This case arises out of a reference under section 66(2) of the Indian Income-tax Act in compliance with the requisition made under that section by the High Court in Judicature at Nagpur by its order dated March 18, 1952.
The statement of the case is as follows : The assessee firm does cloth business at Nagpur under the name "Niranjanlal Ramballabh". The partners of the firm are Messrs. Babulal and Niranjanlal. It was registered under section 26A of the Income-tax Act, the registration taking effect from the assessment year 1946-47. On total sales of Rs. 5,79,143 the assessee showed a profit of Rs. 24,191 that is below 4% which was regarded as extremely low. The Income-tax Officer after scrutinising the ledger accounts of various parties in the books of the assessee felt doubtful about the genuineness of certain deposits in the personal account of persons staying in Marwad. As these deposits formed an important factor in the matter of the present assessment he called for the assessee to show that the deposits wers actually received from the creditors in whose names they appeared in the assessees account books. The accounts in which such deposits are found were as under : 3. The case of the assessee was that the aggregate amount in dispute representing the credits in the accounts of the parties mentioned above were deposits made by them with the assessee firm. The depositors are not residents of Nagpur. According to Babulal who is one of the partners of the firm, Sawitribai Kejriwal is a resident of Jaipur, Sagarmal Agarwal is a resident of Marwad, while the rest of the creditors are of Fatehpur. Babulal stated that the assessee firm has not executed any promissory note, bond, hundi, nor has it pawned any ornaments with the abovenamed creditors in respect of the sums appearing to their names. He stated that letters were received along with the drafts from these creditors and the correspondence has been kept.
4. On the basis of the above statement, Babulal was directed by the Income-tax Officer to produce the letters received from the creditors.
The assessee also filed affidavits executed by Ramgopal Kejriwal, Sawitribai Kejriwal and Sitabai, in support of his contention that the deposits were genuine. In proof of the genuineness of the above deposits the assessee relied on the following : (i) affidavits filed before the Income-tax Officer, (ii) the deposits were received by cheques or drafts on banks in British India and the same were repaid by cheques or drafts and (iii) interest on these was also stated to have been paid by cheques or drafts. The Income-tax Officer was of the opinion that the letters by creditors Sawitribai, Sitabai, Setib and Bhimraj Duggad were not genuine although affidavits were filed in support of the deposits by Ramgopal Kejriwal, Sawitribai and Sitabai. The Income-tax Officer felt doubtful about the genuineness of the loans and directed Babulal that unless the deponents came forward and were prepared to be cross-examined in respect of the transactions which are alleged to have been made, he was not prepared to accept the affidavits at their face value; the assessee expressed his inability to produce the deponents for cross-examination but offered to examine all the depositors on commission, as, according to the assessee, these persons resided at a distance of more than 700 miles from Nagpur, but no commission was issued. The Income-tax Officer held that the deposits amounting to Rs. 43,868 represented profits from undisclosed sources and included them in the total income of the assessee.
5. Against the order of the Income-tax Officer, the assessee went up in appeal. The Appellate Assistant Commissioner of Income-tax, Nagpur, dismissed the appeal. The following is what he has observed in his order with regard to the disputed entries : "I am not inclined to believe that the petitioner was in need of funds or that the non-residents remitted the amounts as deposits. It is strange to find that out of six depositors three are ladies. The petitioner ought to have produced the account books of the non-residents to prove that he received genuine loans but this was not done. A perusal of the original letters filed with the case clearly goes to show that these are not the original letters. The Income-tax Officer felt doubtful about the genuineness of the loans and he wanted to cross-examine the parties but the petitioner did not show his willingness to produce them. I am given to understand that some of the non-residents carry on business at Fatehpur and if the petitioner was serious in the matter he could have easily called them or produced the account books of those persons for examination before the Income-tax Officer. He failed to do so. The burden of proving the nature of the cash credits in doubtful accounts lies with the petitioner and not on the department. Previous records also go to show that substantial amounts were credited in the names of the ladies from Fatehpur in the account books of Seth Bachhraj Amolakchand and these deposits were made through Babulal and were also withdrawn through him when he left the firm on Dewali 1944 and the amounts were credited in the account books of the petitioner. It is, therefore, clear that the petitioner was in possession of sufficient funds and he did not stand in need of deposits or loans. As the cash credits were not satisfactorily explained the Income-tax Officer had no other alternative but to treat the items as receipts from some undisclosed source." The Income-tax Appellate Tribunal at Bombay also dismissed the appeal filed by the assessee by its order dated April 20, 1949, (Annexure E) on the ground that the evidence adduced by the assessee was not sufficient to prove that the amounts in dispute did not belong to them.
6. By the order dated March 18, 1952, the High Court has directed the Tribunal to refer to their Lordships the following question : "Whether in the circumstances of the case the Income-tax Officer acted judicially in adding a sum of Rs. 43,868 as income from undisclosed sources, he having refused the assessee an opportunity to examine the depositors and prove his case that the deposits were genuine." 7. The question that arises on this reference is whether certain amounts standing to the credit of some of the persons with the assessee firm can be treated as the undisclosed profits of the firm itself. A total sum of Rs. 43,868 was brought in the assessment year 1946-47 shown as credits in the names of Sawitribai Kejriwal Rs. 12,000, Sagarmal Agarwal Rs. 10,000, Sitabai Modi two items, each of Rs. 4,168 and 1,700, Ramgopal Kejriwal Rs. 5,000, Bhimraj Duggad Rs. 9,500 and Bhagirathi Bai Rs. 1,500. The above credit entries do not appear to be fictitious. The question that arises for our consideration is whether on the evidence on record it was legitimate to draw an inference that these amounts represented undisclosed profits of the firm.
8. It was contended on behalf of the applicant that the depositors could not be compelled by the Income-tax Officer to appear before him for giving evidence as they resided at a distance of more than 200 miles from Nagpur, and as the assessee had offered to examine them on commission the Income-tax Officer could not have refused to issue a commission for their examination. A grievance of this refusal was made to the Appellate Assistant Commissioner of Income-tax, but he did not pass any order. It is, therefore, contended that as the assessee was refused an opportunity to examine the depositors on commission, the Income-tax Officer did not act judicially in adding the sum of Rs. 43,868 as income from undisclosed sources.
9. As against this, it was contended on behalf of the non-applicant that the applicant did not file a petition for examining the witness on commission. No grievance of it was either made in the grounds of appeal, nor was it made before the Tribunal. The refusal to issue commission for examining the witness cannot, therefore, be made a ground after the statement of the case was finalised. Reliance was placed on Commissioner of Income-tax v. Calcutta Agency Limited.
10. It is not disputed that an application was made by the assessee before the Income-tax Officer to issue a commission for the examination of the creditors. Under section 37 of the Income-tax Act, the Income-tax Officer, Appellate Assistant Commissioner, Commissioner and Appellate Tribunal have the same powers as the civil court under the Civil Procedure Code for enforcing the attendance of any person and examining him on oath or affirmation, compelling the production of documents and issuing commissions for the examination of witnesses. The depositors in the instant case could not be compelled by the Income-tax Officer to appear before him in person for giving evidence as they resided more than 200 miles away from Nagpur. In our opinion, the Income-tax Officer could not have refused to issue such a commission for their examination when the assessee applied for it. The appellate order passed by the Appellate Assistant Commissioner of Income-tax, Nagpur, shows that a grievance, that the request for commission was not granted, was made before him in appeal. The Appellate Assistant Commissioner made a grievance of the fact that the assessee did not produce the accounts of the non-resident depositors to prove the loans.
This grievance of the Appellate Assistant Commissioner is unreasonable when no opportunity was given to the assessee to examine these persons on commission.
11. The same grievance appears to have been repeated before the Appellate Tribunal who called upon the assessee to produce the drafts of two major depositors said to have been received by the assessee.
Those drafts were produced. They were drawn by the Laxmi Bank, Calcutta, on its branch in Nagpur City. The Tribunal observed that these drafts failed to establish the most important point, viz., that the moneys represented by those drafts belonged to the persons in whose names the amounts are credited in the books of the applicant. This, in our opinion, is an unreasonable approach as the depositors alone could have explained whether they had money at the time in Calcutta and why they purchased the particular drafts at Calcutta. The assessee, in our opinion, was justified in pressing his claim for examination of these depositors on commission.
12. In the statement of reference, it was pointed out in paragraphs Nos. 4(9) and 5(e) that no grievance of refusing to issue commission was made by the assessee before the Appellate Assistant Commissioner or before the Tribunal. This appears to be incorrect as it is mentioned in the appellate order of the Appellate Assistant Commissioner that such a grievance was made. No finding was however given by him. Even though no fresh application for issue of commission was made before the Appellate Assistant Commissioner or the Tribunal the original application filed by the assessee before the Income-tax Officer for examining the creditors on commission should have been taken into consideration in determining his objection to the addition of the sum of Rs. 43,868 to his income. Affidavits and letters were filed by the assessee in support of the deposits; if the Department was not satisfied, it should have allowed the assessee to examine the creditors on commission. On the facts actually found and strictly confining our decision to the facts of this case we are of the opinion that the material is not sufficient on which the Department could have come to the conclusion that these credits represented undisclosed profits of the firm.
13. The statement of the case prepared by the Income-tax Appellate Tribunal and submitted to the High Court for its opinion was not persuade by the assessee. He had no opportunity to make suggestions in respect of the same. It cannot be said that the statement of the case was settled with the knowledge and approval of the assessee. On behalf of the assessee no one was present either at the first hearing of the case on the High Courts order under section 66(2) or when the statement of the case was finalised. It is not made clear in the statement of reference whether the assessee was duly served with notice before the statement of the case was finalised. The decision in Commissioner of Income-tax v. Calcutta Agency Limited, is not applicable to the facts of the instant case.
14. Our answer to the question referred to us is in the negative. No order as to costs.