JUDGMENT MANCHANDA J. - This is a case stated under section 66 (2) of the Indian Income-tax Act, 1922 (hereinafter referred to as the Act). The question referred is :
"Whether there was material before the Tribunal to hold that whereas 22 high denomination notes out of a total of 28 high denomination notes could form part of the assessees cash balance, the remaining 6 high denomination notes could not form part of such balance ?"
The material facts are these : The relevant year of assessment is 1947-48, the previous year being Diwali Samvat year 2003, ending October, 1946. The assessee, Hindu undivided family, was carrying on business as a wholesale dealer in sugar and as a commission agent in kirana. The High Denomination Bank Notes (Demonetisation) Ordinance, 1946, was issued on the 12th of January, 1946, with the result that notes of Rs. 1,000 and over ceased to be legal tender. Persons holding high denomination notes were given an opportunity to exchange them in the Reserve Bank. The assessee encashed 28 high denomination notes of Rs. 1,000 each. The Income-tax Officer required the assessee to explain the source of the notes. The explanation was that the assessee had a closing balance, in respect of the account maintained for its business, of Rs. 38,406-8-6 on 11th January, 1946. In other words, the explanation was that these 28 notes had come out of the aforesaid closing cash balance. The Income-tax Officer disbelieved the explanation and treated the entire amount of Rs. 28,000, represented by high denomination notes encashed, as the assessees income from an undisclosed source. The assessee preferred an appeal to the Appellate Assistant Commissioner and contended that, in view of his extensive business and huge import of sugar, it was obliged to keep a substantial amount in hand and the notes encashed being less than the closing cash balance there was no justification for the Income-tax Officer to treat them as income from an undisclosed source. It was also contended that the high denomination notes were hitherto legal tender and there was no obligation upon the assessee to keep a record of the numbers of such notes. The Appellate Assistant Commissioner rejected the contention and upheld the inclusion of Rs. 28,000 in the total income of the assessee as income from an undisclosed source. In the second appeal, the tribunal was duly impressed by the fact that there was a large cash balance but then proceeded to find out how much, out of the daily cash balance with the assessee, could have been in the form of high denomination notes. In such an exercise undertaken by the Tribunal, inevitably, the element of guess and conjecture came in. The Tribunal accepted that 22 notes of the denomination of Rs. 1000 each could have come out of the cash balance of Rs. 38,000 and odd, but was not satisfied that the balance of six notes of Rs. 1,000 each were also from the same source. The appeal was accordingly partly allowed and only an addition of Rs. 6,000 as income from an undisclosed source was sustained. Hence, this reference at the instance of the assessee under section 66 (2) of the Act.
There are a series of cases laying down what the approach in such cases should be. The Supreme Court in Mehta Parikh & Company v. Commissioner of Income-tax has pointed out that the view of the Tribunal that it was impossible for the appellants to have had only 31 high denomination notes and not 61 as claimed by the assessee, which was a reasonable one, could not have been rejected. This court in Kanpur Steel Company v. Commissioner of Income-tax also categorised the finding of the Tribunal such as the one in the present case as based on surmises and conjectures. In that case, out of 32 high denomination notes only seven were accepted and the balance of Rs. 25,000 was added, although the cash balance on the 11th of January, 1946, was Rs. 34,313. It was also pointed out that the recording of the numbers of the high denomination notes was not at all necessary, as such notes could be used as freely as notes of any lower denomination and no one had any idea that it will be necessary for him to explain the possession Court in Lalchand Bhagat Ambica Ram v. Commissioner of Income-tax. In Kanpur Steel companys case it was also pointed out that the department, in relying on the entries relating to the bills of each date, committed an error and no inference should have been drawn from them; that any one single transaction did not exceed Rs. 399 did not preclude the possibility of payment in high denomination notes for such transactions. It was, therefore, held that the Tribunal had rejected the explanation of the assessee on surmises, and there was no material for the Tribunal to hold that the sum of Rs. 25,000 represented suppressed income of the assessee from undisclosed sources. The position in the present case is more or less similar.
For the reasons given above, we would answer the question referred in the negative and in favour of the assessee. The reference is answered accordingly. The department will pay the costs of this reference which we assessee at Rs. 200. Counsels fee is also assessed at Rs. 200.
Question answered in favour of the assessee.