ANSARI, J.- The assessee in these two references has been doing money-lending as well as manufacturing and selling gun-powder. Though he had been assessed to income-tax for the years 1942-43 and 1943-44, during the subsequent five assessment years he has paid no such tax. He had failed to send his returns for the assessment year 1944-45; but had at the request from the Income-tax Officer, filed, on March 31, 1944, his profit and loss accounts for the respective previous years, and the officer had dropped the matter, because the income had then appeared not to be assessable. For the succeeding four years the statement of the case shows the assessees total income and the dates of the orders, whereby they were not assessed, to be as follows :
Assessment year
Date of order
Total income
Rs.
1945-46
10-8-1945
2,234
1946-47
10-12-1946
2,341
1947-48
31-7-1947
4,398
1948-49
29-10-1948
6,332
It appears that another Income-tax Officer, while scrutinising the account books for the assessment year 1949-50, had noticed in the ledger certain credit and debit entries in favour of the assessees mother and his sister and the assessees clerk had informed the officer that there were similar entries in the account books for earlier years. The officer naturally obtained copies of such entries and called the ladies to explain the sources for the amounts. The ladies explained these to be out of their past savings; but the officer was not satisfied by the aforesaid explanations. Accordingly, proceedings under section 34 of the Income-tax Act were started as regards the five assessment years, for which the assessee had not been taxed; and in response to the notices, the returns filed earlier by the assessee were again adopted. The Taxing Officer thereafter found that income had escaped assessment. He has rested his decision on the relevant entries in the account books being in difference ink, as well as on the explanation of the mother, who is stated to have advanced the money to the sister, being unsatisfactory, mainly because she appeared to have had no source from which Rs. 45,500 could have accumulated, that being the total amount of what had been gifted to her daughter during the five assessment years. The assessee failed in his appeal before the Appellate Assistant Commissioner, who was not convinced about the soundness of the legal arguments urged on behalf of the assessee.
The Appellate Tribunal also followed the Appellate Assistant Commissioners view, but committed certain errors, which has undoubtedly caused considerable hardship. The Tribunal dismissed the appeal against the order for the assessment year 1944-45, but modified the orders for the subsequent years in the following manner : The addition for the assessment year 1945-46 was held justified only to the extent of Rs. 1,500 and the appeal was partly allowed; the addition for the assessment year 1946-47 was found not justified and ordered to be deleted; and the addition as regards the assessment year 1947-48 was also reduced to Rs. 17,500 and consequently the appeal for this year was also partly allowed. Finally, the addition for the assessment year 1948-49 was ordered to be completely deleted and the appeal was allowed. It follows that the Appellate Tribunal dismissed one, partly allowed two, and fully two other appeals. These decisions have been given because the Tribunal thought the amounts of the credit entries in the several years to be only Rs. 22,500 whereas their total came to Rs. 46,500. The Department applied under section 35 of the Income-tax Act, claiming the mistake as sufficient justification for exercising the power to review under the section, which was allowed, resulting in dismissal of all the appeals by the assessee. We are now in a position to state the two legal questions that have been referred to us in I.T.R. No. 18 of 1957. They are :
'1. Whether proceedings under section 34 have been validly initiated for all the three years, 1944-45, 1945-46 and 1947-48 ?
2. Whether the order passed by the Tribunal under section 35 of the Act on the application by the Department, annexure E aforesaid, was competent and right in law ?'
While doing so, the Tribunal refused to state certain other questions for each of the three assessment years 1944-45, 1945-46 and 1947-48; but on application to the High Court the Tribunal has been asked and has referred the following three questions :
'1. Whether, on the facts and circumstances of the case, the Tribunal was right in law and had material to hold that the sum of Rs. 3,500 was undisclosed income of the assessee in the year of account ?
2. Whether, on the facts and circumstances of the case, the Tribunal was right in law and had material to hold that the sum of Rs. 5,000 was undisclosed income ?
3. Whether, on the facts and circumstances of the case, the Tribunal was right in law and had material to hold that the sum of Rs. 22,500 was undisclosed income of the assessee in the year of account ?'
Each of the aforesaid questions covers the undisclosed income for each of the three assessment years of 1944-45, 1946-47 and 1947-48, the amounts mentioned in each being the addition the taxing authorities had held to be the concealed income for the relevant year. It will be seen that there are no questions for the assessment years 1946-47 and 1948-49, mainly due to the appeals for these years having been completely allowed and after the subsequent corrections by the Tribunal the period for the assessees application to refer having expired. The assessee, however, had under article 226 invoked the jurisdiction of the Madras High Court, claiming the aforesaid correction by the Appellate Tribunal to be without jurisdiction as the Income-tax Act to ask the Tribunal to correct its mistake. The learned judges found the ground urged in support of the application to be not sufficient and the decision has been reported : vide Kuttikrishnan Nair v. Income-tax Appellate Tribunal. It follows that the decision also becomes relevant for purposes of our answer to the second question in Reference No. 18 of 1957. It is further clear that the remaining four question in both the references must be dealt together.
The counsel for the assessee has fairly argued his clientss case. He has firstly urged that the Department must be reasonably satisfied of the conditions which attract the powers under section 34 of the Income-tax Act and must prove that during the earlier assessment either some income had been concealed, or subsequent information led to the discovery of some income having escaped such earlier assessment. In this connection he relies on Chimanram Motilal v. Commissioner of Income-tax where Beaumont, C. J., has observed that it is for the Income-tax Officer to establish to the courts satisfaction that income has escaped assessment and that it is not for the assessee to prove that no income had escaped assessment. The same view has been taken in Bhimraj Panna Lal v. Commissioner of Income-tax where Raj Kishore Prasad, J., has held that in the first instance the burden of proof was on the income-tax authorities and it was not for the assessee to show that the income had not escaped. The judgment of Raja Priyanand Prasad Singh v. Commissioner of Income-tax also supports what the Bombay High Court has stated earlier, for, Bhargava, J., has at page 329 observed :
'The Department produced no material at all to prove that, in fact, the Income-tax Officer had not fully scrutinised the account books, so that his attention had not been attracted to those entries. There was in this case, therefore, no material at all on the basis of which a finding of fact could be recorded that the Income-tax Officer, who made the original assessment on the 28th November, 1955, had no knowledge at all of the receipt of the income from forests by the assessee at the time of making that assessment. The Department having failed to discharge the burden that lay on it, the Tribunal committed an error in holding that the proceedings were validly taken under section 34 of the Indian Income-tax Act.'
Further Bishan Narain, J., in Chiranji Lal & Sons v. Commissioner of Income-tax, has taken the same attitude and has at page 408 stated :
'Power under this section cannot be exercised on mere rumours or suspicions. It is argued on behalf of the firm that there is no material on the record on which the Income-tax Officer could be said to have had reason to believe that certain profits had escaped assessment. This is a question of law on which the case should be stated by the Income-tax Appellate Tribunal.'
Though there appears to be some conflict in judicial opinions on the point, we think the cases relied on by the assessees counsel have taken the correct view, for it is but fair that the grounds enabling the exercise of the power must be established by the authority claiming to exercise it. Therefore the Department must be reasonably satisfied and where required must justify such facts as would enable it to exercise the powers under section 34. To cast on the assessee the burden of justifying what had been done earlier would thus result in discarding the rule ordinarily followed in every case of claim to exercise powers circumscribed by conditions. Indeed the advocate for the Department has not convinced us about the incorrectness of the view taken in the aforesaid case. Therefore the conditions necessary for attracting the provisions of section 34 must be satisfactorily established and the burden is on the assessing authority.
The next argument of the assessees counsel is that the Department must prove not only that income liable to tax has escaped, but that the income was of the assessee. In support of this argument he has relied on Radhakrishna Behari Lal v. Commissioner of Income-tax, where it has been held that when a sum in the name of a third party is shown in the assessees books, the Department must show by some material the amount not be belong to the third party, but to belong to the assessee. He further relies on Jainarayan Balabakas v. Commissioner of Income-tax where the Nagpur High Court has decided that a particular amount credited to a stranger in the account books of the assessee must be shown by the Department not to belong to him. He also relies on L. R. Bros. v. Commissioner of Income-tax where it has been affirmed that the taxing authority must first discover the materials on the basis of which it could be held that the income was taxable in the relevant year, and though the assessees explanation be found not to be correct, the inference that the income is liable to be taxed would not be correct in every case. The same court has in Chaturbhuj & Co. v. Commissioner of Income-tax decided that where money appearing in the assessees account books and in favour in another is to be taxed, the rejection of the explanation by the assessee is not sufficient, and it does not provide any material for any inference that the money belongs to the assessee. Two further cases have been relied on to support the same argument. The first is Vishnukantham Chetty v. Commissioner of Income-tax where a Division Bench consisting of the learned Chief Justice had Rajagopalan, J., has held that the particular item of income should be shown as having accrued during the year to the assessee. In this connection Rajagopalan, J., has observed :
'There was no evidence either to support any possible finding, whether express or implied, that the amount in question was income that accrued to the assessee in the relevant year of assessment.'
The next is Commissioner of Income-tax v. Gokuldas Harivallabhdas where Chagla, C. J., dealing with the power under section 28 of the Income-tax Act, has held that there was no evidence to prove that the of fence had been committed and the penalty could not be imposed. The learned Chief Justice has further observed that the proceedings under section 28(i)(c) being in the nature of penal proceedings, the duty to prove that the assessee was guilty of the offence was upon the Department. The list of cases in a formidable array of decision in favour of the assessee and disposition would have been unassailable had there not been two pronouncements by the Supreme court. In Govindarajulu Mudaliar v. Commissioner of Income-tax Venkatarama Iyer, J., has held that where an assessee fails to prove satisfactorily the source and nature of certain amounts of cash received during the accounting year, the Income-tax Officer is entitled to draw the inference that the receipts are of an assessable nature. In Lakhmichand Baijnath v. Commissioner of Income-tax the same judge held that as the credits were found in the business accounts of the appellant and the explanation as to how the amounts came to be received were rejected by the income-tax authorities, the authorities were entitled to treat the credits as business receipts and chargeable to tax. These authorities, therefore, fully establish that the burden on the Department would be discharged were the explanation for the particular item in the account be shown to be unsatisfactory. It further follows that the rejection can lead to the conclusion of the entry being liable to taxation. The assessees counsel has relied on Chaturbhuj & Co. v. Commissioner of Income-tax in support of his argument that in the case before the Supreme Court, the particular items in the account book were in the assessees name and, therefore, the principles of the decision should not be extended to where the entry be in the name of a stranger. That was the ground on which Bhargava, J., had distinguished the authority in Chaturbhuj & Co. v. Commissioner of Income-tax. We are not convinced to the correctness of so circumscribing the rule, for, once rejection of the explanation be treated as sufficient for drawing inference against the assessee. It would not be logical to confine such an inference only when the credit item be in the assessees name. Otherwise an assessee would escape the consequence by making the entries in the names of near relations. And if rejection of explanation for entries in the names of relations should entail consequences similar to that of an entry in the assessees name, there is no point in making a different rule for the entry in the a name of a friend. There is much force, therefore, in keeping the rule wide and to interfere only where the inference in the circumstances of a case be perverse. We are fortified by the proposition in Lakhmichand Baijnath v. Commissioner of Income-tax being stated in wide form and the restriction on its operation, where the item be in the name of the stranger, not having been followed in Mohideen Thamby & Co. v. Commissioner of Income-tax. There, Chandra Reddi, C. J., has held that in the absence of a satisfactory explanation it is open to the Department to infer that the money belongs to the assessee. Also the distinction had not been earlier acted upon by Subba Rao, J. : Vide Raghava Reddi v. Commissioner of Income-tax. We, therefore, hold that after rejecting the explanation given by the assessees relation, the Department could legally infer the items to be part of the assessees income and taxable in the particular year. After all, the first is an inference from the facts and the jurisdiction of the fact-finding authority should not be circumscribed by stating that such an inference can be drawn only where the entry be in the assessees name. In these circumstances we feel that the income-tax authorities have not erred in law. We further think that after the explanation by the mother and sister in the case about the particular items being theirs were not accepted, the only other inference would be that the items form part of the assessees income, for it is nobodys case that they were capital gains, nor other persons cash. The Tribunals conclusions, therefore, cannot be treated as perverse nor can the finding be treated as one whereof there is no evidence in support. The result is that the answers to the first question in I.T.R. No. 18 of 1957 and to the three questions in I.T.R. No. 19 of 1959 are in favour of the Department.
There remains the second question in I.T.R. No. 18 of 1957. Having given our best attention to the arguments of the counsel for the assessee, we feel that the Tribunal had jurisdiction to correct the error, which view is conceded to be supported by the decision of the Bombay High Court as well. Therefore the second question in I.T.R. No. 18 of 1957 is also answered against the assessee. Having regard to the circumstances that the assessee has been prejudiced by the error of the Tribunal, we made no order as to costs in these references. Accordingly the reference is answered.
Reference answered accordingly.