Smt. Srilekha Banerjee & Ors Vs.
Commissioner of Income-Tax, Bihar and Orissa  INSC 75 (27 March 1963)
27/03/1963 HIDAYATULLAH, M.
CITATION: 1964 AIR 697 1964 SCR (2) 552
RF 1986 SC1849 (11)
Income Tax-Sale of high, denomination
notes-Sale proceeds, if liable to tax-Indian Income-tax Act, 1922 (11 of 1922).
The assessee had encashed 51 high
denomination notes of Rs. 1,000/- each in January, 1946. The assessee's
explanation in his application for encashment of the notes was that he was a
colliery proprietor and contractor, that for conducting the business and for
payment to labour which came to about Rs.30,0001-to 40,000/- every week he had
to keep large sums of money to meet emergency and that the sum of Rs.
50,000/realised by encashment of the notes was neither profit nor part of
profit but was floating capital for the purpose of, conducting business. The
Income--tax Officer did not accept this explanation and treated this amount as
profit from some undisclosed 553 source and assessed it as assessable income.
The assessee contended that the burden lay on the department to establish that
the amount in question was income liable to tax and that the department had
failed to establish this.
Held that the department was justified in
holding that Rs. 51,000/- was assessable income of the assessee from some
undisclosed source. It was not correct that the assessce was not required to
prove anything and that the burden was entirely upon the department to prove
that the amount received from the encashment of high denomination notes was
income. The correct position is as follows. If there is an entry in the account
books of the assessee which shows the receipt of a sum or conversion of the
notes by the assessee himself, it is necessary for the asscssee to establish,
if asked, what the source of that money was and to prove that it did not bear
the nature of income. The department is not at this stage required to prove
anything. If tile business, the state of accounts and dealing of the assewsee
show that he might have, for convenience, kept the whole or part of a
particular sum in high denomination notes, the assessee prima facie discharges
his initial burden. If the assessee does this the department cannot act
unreasonably and reject that explanation to hold that it was income. If the
explanation is unconvincing, the department can reject it and draw the
inference that the amount represents income either from the source already
disclosed by the assessee or from some undisclosed source. Before the
department rejects such evidence it must either show an inherent weakness in
the explanation or rebut it by putting to the assessee some information or
evidence which it has in its possession. The fact that there was receipt of
money or conversion of notes is itself prima facie evidence against the
assessee on which the department can Proceed in absence of good explanation.
In the present case though cash used to be
received from Banks and sent to the various places where works were carried on
by the asscssee and vice versa, no central account of such transfers was
disclosed. There was also no account of personal expenses of the assessee and
he failed to prove why such large sums were kept at hand in one place when at
each of the places where work was carried on, there were Banks with which he
had accounts. Further though this large sum was kept on hand, further cheques
were drawn to meet current needs and this amount remained untouched.
Kanpur Steel Co. Ltd. v. C. I. T.  32
I. T. R. 56, Lalchand Bhagat Ambica Ram v. Commissioner of Income-tax, Bihar
and Orissa,  37 I. T. R. 288; Mahindranath v.Commissioner of Income-tax,
Bihar and Orissa,  554 27 1. T. R. 522, A. Govindarajulu Mudaliar v.
Commissioner of Income-tax, Hyderabad,  34 1. T. R. 807, Chunilal
Ticamchand Coal Co. Ltd. v. Commissioner` of Income-tax, Bihar and
Orissa, 27 I. T. R. 602, Mehta Parikh & Co. v. Commissioner of
Income-tax, Bombay  30 1. T. R. 181 and Soyachand Baid v. Commissioner of
Income-tax,  34 1. T. R. 650, referred to.
CIVIL APPELLATE, JURISDICTION: Civil Appeal
No. 486 of 1962.
Appeal by special leave from the judgment and
decree dated September 24, 1959, of the Patna High Court in Miscellaneous
judicial Case No. 318 of 1957.
A.V. Viswanatha Sastri and P. K. Chatterjee,
for the appellants.
K. N. Rajagopal Sastri and R. N. Sachthey,
for the respondent.
1963. March 27. The judgment of the Court was
delivered by HIDAYATULLAH J.-This is an assessee's appeal by special leave of
this Court against an order of the High Court of Patna, answering in favour of
the Department the question "whether in the circumstances of the case the
amount of Rs. 51,000 being the value of high denomination notes encashed by the
assessee, has been validly taxed as profits from some undisclosed
business". The original assessee, Rai Bahadur H. P. Banerjee, is dead.-
His son, who was substituted in his place, also died during the pendency of the
proceedings in the High Court. The present appeal has been filed by the widow
of the son and other legal representatives.
Banerjee was the owner of several collieries
in the Jharia Coal fields in the State of Bihar and 555 was also a contractor
for raising coal. This matter relates to the assessment year 1946-47. For that
year, Banerjee was assessed on an income of Rs. 1,28,738. The assessment was
then re-opened under s. 34 of the Indian Income-Tax Act, and was enhanced, but
subsequently on appeal, it was reduced to a sum a little below the original
assessment. The present assessment was made on a second re-opening of the case
under s. 34 in the following circumstances.
On January 22, 1946, Banerjee encashed high
denomination notes of the value of Rs. 51,000/-. In his application under the
Ordinance which demonetized high denomination notes, Banerjee gave the reason
for the possession of the notes as follows:- "I am engaged in business as
colliery proprie- tor, contractor under Messrs. Kilburn & Co. in the name
and style of H.P. Banerjee & Son and also under the State Rly. Bokaro,
Swang, Hazaribagh district in the name of Jharia Dhanbad Coal & Mica Mining
Co.............. For conducting the business and payment to labour, I have to
pay every week between 30/40 thousand as I did not get payment for work done
every week. I had to keep large sum of money to meet
emergency........................ It is neither profit nor part of profit-it is
very floating capital for purpose of conducting business. It is not an excess
He stated that he had accounts with (1)
Imperial Bank of India, (2) Nath Bank Ltd., jharia, and (3) Central Bank of
India Ltd., Bhowanipore Branch, but added that he did not remember exactly from
which Bank the notes came into his possession, as his transanctions were
frequent. The notice which was issued to him under s. 34 of the Income Tax Act,
was not questioned on any of the grounds which are usual in such cases.
Banerjee's explanation 556 was not accepted. The Income Tax Officer pointed out
that although his business was large and the withdrawals from the various banks
were large and frequent, he had not maintained a central account showing
withdrawals from the banks and remittances made to his various businesses, and
that none of the books maintained by the assessee and produced by him,
contained a bank account. The Income Tax Officer found a discrepancy of nearly
Rs. 50,000 in the statements filed by the assessee. He, accordingly, treated
the high denomination notes as profits from some undisclosed source and
assessed them as assessable income. Banerjee appealed to the Appellate
Assistant Commissioner and further to the Tribunal. Both the authorities upheld
the order of the Income Tax Officer. The assessee demanded a case which was
refused, but the High Court directed a statement of the case on the question
already quoted. The High Court decided the question against the assessee, and
hence this appeal.
The connection of the appellants is that
since the Department had issued a notice under s. 34 of the Income Tax Act, it
was incumbent on the department to establish that the amount in question was
income which had escaped assessment. The appellants also contend that even if
the assessee was required to prove the source of the high denomination notes,
he had sufficiently proved it by showing that he had large amounts on hand,
which were held for convenience in high denomination notes. The appellants thus
submit that the burden, if any, upon the assessee was discharged in the case,
and the evidence being unrebutted, the additional assessment could not be made.
The appellant rely upon Kanpur Steel Co., Ltd. v. C. 1. T. (1) where, according
to the appellants, the Allahabad High Court explained the nature of burden of
proof in the way contended for by the appellants. They (1)  32 I. T. R.
557 claim that the Allahabad case applies to
the facts here and point out that the said ruling was considered and approved
by this Court in Lalchand Bhagat Ambica, Ram v. Commissioner of Income Tax,
Bihar and Orissa (1). Other cases have been cited on behalf of the department.
The cases involving the encashment of high
denomination notes are quite numerous. In some of them the explanation tendered
by the tax-payer has been accepted and in some it has been rejected. The manner
in which evidence brought on behalf of the tax-payer should be viewed, has of
course, depended on the facts of each case. In these cases in which the
assessee proved that he had on the relevant date a large sum of money
sufficient to cover the number of notes encashed, this Court and the High
Courts, in the absence of something which showed that the explanation was
inherently improbable, accepted the explanation that the assessee held the
amount or a part of it in high denomination notes. In other words, in such
cases, the assessee was held prima facie to have discharged the burden which
was upon him.
Where the assessee was unable to prove that
in his normal business or otherwise, he was possessed of so much cash, it was
held that the assessee started under a cloud and must dispel that cloud to the
reasonable satisfaction of the assessing authorities, and that if he did not,
then, the Department was free to reject his explanation and to hold that the
amount represented income from some undisclosed source.
The case which is strongly relied upon by the
assessee is Kanpur Steel Co., Ltd. v. C. I. T.(2). In that case, 32 notes of
Rs. 1,000 were encashed. It was claimed that they were part of the cash balance
of the company which amounted to Rs. 34,000 odd. The Income Tax Officer
examined the entries regarding sales preceding the encashment of the notes and
(1)  37 I.T.R. 288 (2)  32 I.T.R. 56. 568 found that those sales
brought in sums under Rs. 1,000 and could not have resulted in the accumulation
of so many high denomination notes. The Tribunal then came to the conclusion
that Rs. 7,000 only could have been held in high denomination notes. On a
reference, the Allahabad High Court held that the burden lay upon the
Department to prove that Rs. 32,000 was suppressed income and there was no
burden on the assessee to show whence he got the notes, because until
demonetization, there was no idea that possession of high denomination notes
would have to be explained. The High Court also found that the explanation was
fairly satisfactory, because big notes might have been received even in small
transactions and change taken, and that the High Court could not make a
conjecture how many notes could or could not have accumulated. It is contended before
us that the burden in such cases lies as stated by the Allahabad High Court.
On the other hand, in Manindranath Das v.
Commissioner of Income Tax, Bihar & Orissa (1), the tax-payer had encashed
Notes of the value of Rs. 28,600, which he contended were his accumulated
savings. His explanation was accepted in respect of Rs. 15,000, because 15
notes could be traced to a bank, but was rejected in respect of the balance.
The Patna High Court pointed out that if an assessee received an amount in the
year of account, it was for him to show that the amount so received did not
bear the character of income, and the tax-payer in the case had failed to prove
this fact in respect of the remaining notes. The Patna case finds support in A.
Govindaraju Mudaliar v. Commissioner of Income Tax Hyderabad; (2), where it is
laid down by this Court that if an assessee fails to prove satisfactorily the
source and nature of an amount received by him during the accounting year, the
Income Tax Officer is entitled to draw the inference that the (1) (1955) 27
(2)  94 I.T.R .8.70 559 receipts are of
an assessable nature. In that case, the explanation-of the assessee in respect
of the amounts shown as credits for him in the account books of a firm of which
he was a partner, was rejected as un true. It was held that it was open to the
Income Tax Officer and the Appellate Tribunal to hold that the amounts
represented the concealed income of the assessee.
From the last two cases, it is plain that if
there is receipt of an amount in the accounting year, it is incumbent in the
first instance upon the assessee to show that it does not bear the character of
income. If be fails to do this, the Income Tax Officer may hold that it
represents income of the assessee either from the sources he has disclosed or
from some undisclosed source.
In applying this principle to the cases of
encashment of high denomination notes, there is some difficulty when the
assessee has books of account which are accepted and in which there is a cash
balance sufficient to cover the amount of high denomination notes. Each case
must depend upon its own peculiar facts. A few illustrative cases may be
noticed, because they show some differences in the approach to the problem. In
Chunilal Ticamchand Coal Co., Ltd., v. Commissioner of Income Tax, Bihar and
Orissa (1), high denomination notes of the value of Rs. 68,000 were encashed.
Evidence showed that the assessee was in the
habit of keeping large sums which he kept intact for emergencies and meeting
the current needs from withdrawals from the banks.
This explanation was supported by receipts
and disbursement in the books of account. The explanation was rejected as to a
part because the accounts did not mention the high denomination notes and
further because such notes were hardly needed to pay wages to labourers. The
Tribunal, however, held that the explanation might be true as to a part (1)
 27 I. T. R. 602.
560 and accepted it in respect of Rs. 35,000,
rejecting it in respect of Rs 33,000. The Patna High Court held that the
explanation which was held to be reasonable as to a part must be good for the
whole, because there was no material on which it could be held that the balance
constituted income from some undisclosed source to distinguish the case about
the part rejected from the part accepted.
In Mehta Parikh & Co. v. Commsioner of
Income Tax, Bombay, (1) high denomination notes of the value of Rs.61,000 were
encashed. The explanation was that they were part of the cash balance on hand.
The accounts disclosed that in order to sustain the explanation, it would have
to be presumed that the entire balance on January 1, 1946, was held in 18 notes
of Rs. 1,000 each and that all receipts up to.' January 18,1946, when the notes
were encashed, were also in High denomination notes. The affidavits of persons
who stated that they had paid amounts in Rs.1,000 notes were not accepted. The
Tribunal accepted the explanation as to Rs.31,000 only. This Court held that if
the account books were accepted and the deponents were not cross examined on
their affidavits, the rejection of the explanation as to a part proceeded only
on surmise and the finding that Rs.30,000 were income from some undisclosed
source was based on no evidence. It may be pointed out that Venkatarama Ayyar
J., in that case, chose to rest his decision on the second ground only,
treating the decision as involving an error of law. But in Sovachand Baid v.
Commissioner of Income Tax, (2) high denomination notes of the value of
Rs.2,28,000 were encashed. The assessee stated that he had inherited that
amount from his father in 1942, and produced account books from 1926 to 1942.
He did not produce earlier account books. The Tribunal found that the books
were such as could be written at any time and did not contain full dealings
even between 1926 and (1)  30 I.T.R. 181.
(2)  34 I.T.R. 650, 561 1942, and there
were no entries showing that any amount as such was received from business. The
Tribunal, however, held that Rs.1,28,000 only was income from some undisclosed
source. The assessee's appeal in this Court was dismissed, because the
rejection of the account books was held to be reasonable in the circumstances
of the case. This Court observed that the partial rejection of the explanation
by the Tribunal must be treated as a concession rather than a reasoned
We now come to Lalchand Bhagat's case which
is strongly relied upon, particulary, as it has cited the Allahabad case, so it
is said, with omplete approval. It is therefore, necessary to examine it
closely to see if there is such an approval. In that case, 291 high
denomination notes of the value of Rs.2,91,000 were encashed. The assessee was
maintaining for a long time past two accounts:
one was known as "Almirah Account",
and other, "Rokar Account". On the date the notes were encashed there
was a balance of Rs.2,81,397 in the almirah account and Rs.29,284 in the rokar
account. These two amounts between them were sufficient to cover the encashed
notes. The explanation was that for the purposes of the business which was
distributed in many branches, a large amount of ready cash was always kept at
the head office, so that any emergency might be met.
The business of the assessee was admittedly
extensive and the almirah account had also existed for several years.
Except in the previous year in which the high
denomination notes were encashed, even the numbers of the high denomination
notes used to be shown in the almirah account.
The explanation was rejected on the ground
that those were the days of emergency and the assessee, as a grain dealer,
could have secretly made money by smuggling grain, and that he had once been
prosecuted, though acquitted. It was also said that the area where he did his
business was 562 notorious for smuggling and also that he had speculated in the
year and might easily have made profits, though he- had returned a loss from
speculation. Emphasis was also laid upon the fact that in the year of account,
the numbers of the high denomination notes were written subsequently. The
Tribunal accepted the two books of account as genuine and also that there was a
balance of Rs.3,10,681 with the assessee. Before the Tribunal it was explained
that in the year of account the numbers of the high denomination notes were inserted
in the almirah account out of nervousness owing to the demonetization of the
notes. The Tribunal accepted the explanation with regard to Rs. 1,50,000 and
rejected it with regard to Rs.1,41,000. No reasons were given for
distinguishing the good part of the explanation from the bad.
This Court examined the reasons and held that
except for the insertion of the numbers of notes in the book, none of the other
reasons had any probative value and that they were mere conjectures and
surmises. This court pointed out that if the explanation for the interpolations
was good for the acceptance of the explanation as to Rs.1,50,000, it must be
held to be good also for the balance, because there was nothing to distinguish
between the two parts. This Court, therefore, pointed out that the main
question about Rs.1,41,000 was whether there was any material to justify a
different conclusion in respect of that amount and pointed to the following
facts. The assessee had established the need for keeping a large sum on hand and
had proved the almirah account as a genuine account. The almirah account
contained the numbers of the high denomination notes in the years previous to
the year relative to the assessment. In that year, the numbers were inserted
subsequently and this was the only substantial point against the assessee. This
Court also pointed out that there were statements of banks and accounts 563 of
the branches and of beparis, showing that large amounts were received by the
assessee, which made up the amount in the almirah account. Between February 6,
1945 and January 11, 1946, when the notes were encashed, sum,, above Rs.
1,000 received by the assessee aggregated to
as much as rupees five lakhs. As the almirah account was not questioned by the
Tribunal at all, and out of that amount, more than half was held to be in the
shape of high denomination notes, this Court posed the following question:-
"Was there any material on record which would legitimately lead the
Tribunal to come to the conclusion that the nature of the source from which the
appellant derived the remaining 141 high denomination notes of Rs. 1000
The Court, therefore, concluded "If the
entries in the books of account in regard to the balance in the Rokar and the
balance in the Almirah were held to be genuine logically enough there was no
escape from the conclusion that the appellant had offered reasonable
explanation as to the source of the 291 high denomination notes of Rs. 1000
each which it had encashed on January 19, 1946".
The case of assessee was thus accepted in
toto. This Court did not hold that the assessee need not prove anything. As we
have said earlier, the burden of proof must depend on the facts of the case.
One such fact may be the existence of a large floating cash balance on hand,
and taken with other facts, may be sufficient to show that the high
denomination notes constituted the whole or part of that balance. In the
Allahabad case, such a balance was proved and was accepted as to a part by the
564 Tribunal. The High Court held that the explanation was good for the whole
of the amount of the notes. No doubt, this Court, in referring to that case,
summarised the reasons, but it pointed out that it was not open to the Tribunal
to make a guess as to the number of high denomination notes which could be
accepted, and cited the Allahabad case and some others in that connection.
It seems to us that the correct approach to
questions of this kind is this. If I here is an entry in the account books of
the assessee which shows the receipt of a sum or conversion of high
denomination notes tendered for conversion by the assessee himself, it is
necessary for the assessee to establish, if asked, what the source of that
money is and to prove that it does not bear the nature of income. The
Department is not at this stage required to prove anything. It can ask the
assessee to bring any books of account or other documents or evidence pertinent
to the explanation if one is furnished, and examine the evidence and the
explanation. If the explanation shows that the receipt was not of an income
nature, the Department cannot act unreasonably and reject that explanation to
hold that it was income. If, however, the explanation is unconvincing and one
which deserves to be rejected, the Department can reject it and draw the
inference that the amount represents income either from the sources already
disclosed by the assessee or from some undisclosed source. The Department does
not then proceed on no evidence, because the fact that there was receipt of
money, is itself evidence against the assessee. There is thus prima facie
evidence against the assessee which he fails to rebut, and being unrebutted,
that evidence can be used against him by holding that it was a receipt of an
income nature. The very words "an undisclosed source" show that the
disclosure must come from the assessee and not form the Department. In cases of
high denomination notes, 565 where the business and the state of accounts and
dealings of the assessee justify a reasonable inference that he might have for
convenience kept the whole or a part of a particular sum in high denomination
notes, the assessee prima facie discharges his initial burden when he proves
the balance and that it might reasonably have been kept in high denomination notes.
Before the Department rejects such evidence, it must either show an inherent
weakness in the explanation or rebut it by putting to the assessee some
information or evidence which it has in its possession. The Department cannot
by merely rejecting unreasonably a good explanation, convert good proof into no
proof. It is within the range of these principles that such cases have to be
decided. We do not think that the Allahabad view puts no burden upon the
assessee and throws the entire burden on the Department. The case itself does
not bear this out. If it does, then, it is not the right view.
In the present case, the assessee claimed
that the high denomination notes were a part of the cash balance at the head
office. The Income Tax Officer found that at first the cash on hand was said to
be Rs. 1,62,022, but on scrutiny, it was found to be wrong. Indeed, the
assessee himself corrected it before the Appellate Assistant Commissioner and
stated there that the balance was Rs. 1,21,875. Ordinarily, this would have
prima facie proved that the assessee might have kept a portion of this balance
in high denomination notes. But the assessee failed to prove this balance, as
books of the assessee did not contain entries in respect of banks. Though cash
used to be received from banks and sent to the various places where works were
carried on and vice versa, no central account of such transfers was disclosed.
There was also no account of personal
expenses of the assessee and he had failed to prove why such large sums were
kept on hand in one place when at each of the places where work was carried 566
on, there were banks with which he had accounts. The Appellate Assistant
Commissioner also went into the question and found that on the same day when
the high denomination notes were encashed, a sum of Rs. 45,000 was drawn by
cheque. The next remittance immediately afterwards was of Rs. 16,000 to Bokaro,
but Rs. 17,000 were withdrawn a few days before to meet this expense. A
withdrawal of Rs. 8,000 was made a day later and Rs. 20,000 were withdrawn ten
days later to finance the business. It appears that the money on hand (Rs.
45,000) was not touched at all, but on January 30, 1946, a further sum of Rs.
6,000 was withdrawn and not utilized, which made up the sum of Rs. 51,000 for
which the high denomination notes were encashed.
On these facts, the Tribunal came to the
conclusion that the high denomination notes represented not the cash balance
but some other money which remained unexplained, and the Tribunal treated it as
income from some undisclosed source.
The High Court held on the above facts and
circumstances that there were materials to show that Rs. 51,000 did not form
part of the cash balance, and the source of money not having been
satisfactorily proved, the Department was justified in holding it to be
assessable income of the assessee from some undisclosed source. In this
conclusion, the High Court was justified, regard being had to the principles we
have explained above.
The argument that as this was a case under s.
34 of the Income Tax Act, it cast a special burden on the Department to show
that this income had escaped earlier, need not detain us. No doubt, proceedings
under s. 34 can only be commenced under the conditions prescribed in the
section, but when the proceedings are validly commenced, there is no difference
between an ordinary assessment and an additional assessment under s. 34, and
the same rule 567 as to burden of proof governs the additional assessment.
In our opinion, this appeal has no substance;
it fails and is dismissed with costs.