# MESSRS. LALCHAND BHAGAT AMBICAL RAM v. THE COMMISSIONER OF INCOME-TAX, BIHAR & ORISSA

- **Citation:** [1960] 1 S.C.R. 301
- **Court:** Supreme Court of India
- **Decided:** 1960
- **Case number:** Civil Appeals Nos. 679 and 680 of 1957
- **Bench:** S. R. DAs, N. H. Bhagwati, M. Hidayatullah
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/messrs-lalchand-bhagat-ambical-ram-v-the-commissioner-of-income-tax-bihar-orissa-1758
- **Pages:** 20

## Headnote

Income-ta.<t-Assessment based on conjectures-Fact finding
authority acting without evidenc~-Power of court to interfere-High
Denomination Bank Notes (Demonetisation)
Ordinance,
z946
(Ordinance III of z946).
The appellant a Hindu undivided family carryii:ig on business
in grain kept its books of account according to the mercantile
system and maintained in its cash books two accounts : one
showing the cash balances from day to day and the other known
as" Almirah account" wherein were kept large balances which
were not required for the day-to-day working of the business.
On January 12, 1946, on which date the High Denomination
Bank Notes (Demonetisation) Ordinance, 1946, was promulgated,
the cash balances of the appellant were Rs. 29,284 in its Rokar
and Rs. 2,81,397 in the Almirah account. For the assessment
year 1946-47 the appellant filed its Income-tax Return showing a
loss of Rs. 46,415 in the business. The Income-tax Officer, in the
course of the assessment, noticed that the appellant encashed
high denomination notes of the value of Rs. 2,91,000 on
January 19, 1946, and the explanation given by the appellant
was that these notes formed part of its cash balances including
cash balance in the Almirah account, but it was rejected by the
Income-tax Officer relying on the following circumstances:
(I) that the appellant's food grains licence had been cancelled for
the accounting year for its failure to keep proper stock accounts,
(2) that the appellant was prosecuted under the Defence of India
Rules but had been acquitted having been given the benefit of
doubt, (3) that the appellant was a speculator, and as such could
easily have earned amounts far in excess of the value of the high
denomination notes encashed, (4) that notwithstanding the fact
that the period was very favourable to the food grains dealers
the appellant had declared a loss for the assessment year 1944·45
up to 1946-47, though it had the benefit of a large capital on hand,
and (5) that the appellant was one of the premier grain merchants
of Sahibganj, a place which had gained sufficient notoriety for
smuggling foodgrains.
The Income-tax Officer came to the conclusion that the appellant had all these probable sources from
which it could have earned the sum of Rs. 2,91,000, and
accordingly. he treated the sum as the appellant's secreted profits
from business and included it in its total income. The Appellate
Tribunal accepted the account books produced by the appellant
I959
May I4.
302
SUPREME COURT REPORTS [1960(1)]
x959
and examined the cash book and taking into consideration all the
circumstances which had been adverted to by the Income-tax
Lale/land Bhagat Officer took the view that the appellant might be expected to
Ambi&al Ram
have possessed as part of its business cash balance of at least
v.
. Rs. l,50,000 in the shape of high denomination notes on
Tlte Commissioner January 12, 1946, when the Ordinance was promulgated, but that
of Ineome-tru
the nature of the source from which the appellant derived the
remaining 141 high denomination notes of Rs. l,ooo each remained
unexplained to its satisfaction. It accordingly reduced the
amount considered as the secreted profits from Rs. 2,91,000 to
Rs. l,41,000. On reference, the High Court held that the finding
arrived at by the Tribunal was one of fact and that it could not
be urged that it was based on no evidence. On appeal to the
Supreme Court it was contended for the appellant that the finding
arrived at by the authorities concerned, though it be one of fact,
was vitiated by reason of the authorities indulging in conjectures,
suspicions and surmises and basing the same on no material
whatever which would go to support the same, and that, in any
case, it was a preverse one which a reasonable body of men could
not have arrived at on the material on the record.
Held, that the Tribunal had been influenced by the suspicions,
conjectures and surmises which were freely indulged in by the
Income-tax Officer, and had arri

## Text

_Characters 0–39,648 of 46,087. This is a partial read: ask again with offset=39648 for what follows._

S.C.R.
SUPREME COURT REPORTS
301
MESSRS. LALCHAND BHAGAT AMBICAL RAM
v.
THE COMMISSIONER OF INCOME-TAX,
BIHAR & ORISSA
(S. R. DAs, C.J., N. H. BHAGWATI, and
M. HIDAYATULLAH, JJ.)
Income-ta.<t-Assessment based on conjectures-Fact finding
authority acting without evidenc~-Power of court to interfere-High
Denomination Bank Notes (Demonetisation)
Ordinance,
z946
(Ordinance III of z946).
The appellant a Hindu undivided family carryii:ig on business
in grain kept its books of account according to the mercantile
system and maintained in its cash books two accounts : one
showing the cash balances from day to day and the other known
as" Almirah account" wherein were kept large balances which
were not required for the day-to-day working of the business.
On January 12, 1946, on which date the High Denomination
Bank Notes (Demonetisation) Ordinance, 1946, was promulgated,
the cash balances of the appellant were Rs. 29,284 in its Rokar
and Rs. 2,81,397 in the Almirah account. For the assessment
year 1946-47 the appellant filed its Income-tax Return showing a
loss of Rs. 46,415 in the business. The Income-tax Officer, in the
course of the assessment, noticed that the appellant encashed
high denomination notes of the value of Rs. 2,91,000 on
January 19, 1946, and the explanation given by the appellant
was that these notes formed part of its cash balances including
cash balance in the Almirah account, but it was rejected by the
Income-tax Officer relying on the following circumstances:
(I) that the appellant's food grains licence had been cancelled for
the accounting year for its failure to keep proper stock accounts,
(2) that the appellant was prosecuted under the Defence of India
Rules but had been acquitted having been given the benefit of
doubt, (3) that the appellant was a speculator, and as such could
easily have earned amounts far in excess of the value of the high
denomination notes encashed, (4) that notwithstanding the fact
that the period was very favourable to the food grains dealers
the appellant had declared a loss for the assessment year 1944·45
up to 1946-47, though it had the benefit of a large capital on hand,
and (5) that the appellant was one of the premier grain merchants
of Sahibganj, a place which had gained sufficient notoriety for
smuggling foodgrains.
The Income-tax Officer came to the conclusion that the appellant had all these probable sources from
which it could have earned the sum of Rs. 2,91,000, and
accordingly. he treated the sum as the appellant's secreted profits
from business and included it in its total income. The Appellate
Tribunal accepted the account books produced by the appellant
I959
May I4.
302
SUPREME COURT REPORTS [1960(1)]
x959
and examined the cash book and taking into consideration all the
circumstances which had been adverted to by the Income-tax
Lale/land Bhagat Officer took the view that the appellant might be expected to
Ambi&al Ram
have possessed as part of its business cash balance of at least
v.
. Rs. l,50,000 in the shape of high denomination notes on
Tlte Commissioner January 12, 1946, when the Ordinance was promulgated, but that
of Ineome-tru
the nature of the source from which the appellant derived the
remaining 141 high denomination notes of Rs. l,ooo each remained
unexplained to its satisfaction. It accordingly reduced the
amount considered as the secreted profits from Rs. 2,91,000 to
Rs. l,41,000. On reference, the High Court held that the finding
arrived at by the Tribunal was one of fact and that it could not
be urged that it was based on no evidence. On appeal to the
Supreme Court it was contended for the appellant that the finding
arrived at by the authorities concerned, though it be one of fact,
was vitiated by reason of the authorities indulging in conjectures,
suspicions and surmises and basing the same on no material
whatever which would go to support the same, and that, in any
case, it was a preverse one which a reasonable body of men could
not have arrived at on the material on the record.
Held, that the Tribunal had been influenced by the suspicions,
conjectures and surmises which were freely indulged in by the
Income-tax Officer, and had arrived at its conclusion, as it were
by a rule of thumb, without any proper materials before it and
that its finding could not be sustained; that having accepted the
appellant's books of account it was not open to the Tribunal to
accept the explanation of the appellant in part as to Rs. l,50,000
and reject the same in regard to the sum of Rs. l,41,000.
Messrs. Mehta Parikh 0- Co. v. The Commissioner of Incometax, Bombay, [1956] S.C.R. 626 and Kanpur Steel Co. Ltd. v.
Commissioner of Income-tax, Uttar Pradesh, [1957] 32 I.T.R. 56,
relied on.
Where a Tribunal has acted without any e\'idence or upon a
view of the facts which could not reasonably be entertained o~
the facts found were such that no per.on acting judicially and
properly instructed as to the relevant law could have found, the
court is entitled to interfere.
Dhirajlal Girdharilal v. Commissioner of Income-tax, Bombay,
[1954] 26 I.T.R. 736; Dhakeswari Cotton Mills Ltd. v. Commissioner
of Income-tax, West Bengal, [1955] I S.C.R. 941; Messrs. Mehta
Parikh and Co. v. The Commisioner of Income-tax, Bombay, [1956]
S.C.R. 626 and Meenakshi Mills, Madurai v. Commissioner of
Income-tax, Madras, [1956] S.C.R. 691, followed.
CIVIL APPELLATE JURISDICTION: Civil Appeals Nos.
679 and 680 of 1957.
Appeals by special leave from the judgment and
decree dated the January 5, 1955, of the Patna. High
Court, in M.J.C. Nos. 374 & 375 of 1952.
S.C.R
SUPREME COURT REPORTS
303
R. J. Kolah and R. Patnaik, for the appellant.
A. N. Kripal and D. Gupta, for the respondent.
1959. May 14. The Judgment of the Court was
1959
Lalchcmd Bhagat
Ambical Ram
v.
delivered by
The Commissioner
BHAGWATT .J.-These are two connected appeals
of Income-tax
with special leave granted by this Court under Art. 136
of the Constitution and arise out of the appellant's
assessment to Income-tax for the assessment year
1946-4 7 and Excess Profits Tax for the chargeable
accounting period January 9, 1945, to February 2, 1946.
The appellant is a Hindu undivided family carrying
on extensive business in grain as merchants and commission agents. It is one of the premier grain merchants and wholesalers of Sahibganj in the District of
Santhal Parganas in the State of Bihar. It has branches at Nawgachia in the District of Bhagalpur and at
Dhulian in the District of Murshidabad in West
Bengal.
The appellant filed its Income-tax Return for the
assessment year 1946-4 7 showing a loss of Rs. 46,415
in the business. The Income-tax Officer, Patna, however, in the course of the assessment noticed that the
appellant had encashed high denomination notes of
the value of Rs. 2,91,000 on January 19, 1946. The
Income-tax Officer asked for an explanation which
the appellant gave stating that these notes formed
part of its cash balances including cash balance in the
Almirah account. The cash balances of the appellant
on January 12, 1946, on which date the High Denomination Bank Notes (Demonetisation) Ordinance, 1946,
was promulgated were Rs. 29,284-3-9 in its Rokar and
Rs. 2,81,397-10-0 in the Almirah account. TheAlmirah
account was an account for moneys withdrawn and
kept at home. The appellant sought to prove the fact
that the high denomination notes encashed by it formed part of its cash balances from certain entries in
its accounts wherein the fact that moneys were received in high denomination notes had been noted.
Portions of these entries to the effect that moneys had
been received in high denomination notes were found
Bhagwati ].
304
SUPREME COURT REPORTS [1960(1)]
z959
by the Income-tax Officer to be subsequent interpolaLalchana Bhagat tions made by the appellant with a view to advance
Ambical Ram
its case that the cash balances contained the high
v.
denomination notes encashed by it. The Income-tax
The Commissioner Officer found that the appellant's food grains licence·
0! Incom•-t=
at Nawgachia had been cancelled for the accounting
year for its failure to keep proper stock accounts and
BhagwaJi j.
that the appellant was prosecuted under the Defence
of India Rules but had been acquitted having been
given the benefit of doubt. The Income-tax Officer
also had regard to the fact that the appellant was a
speculator and that as a speculator the appellant could
easily have earned amounts far in excess of the value
of the high denomination notes encashed. He considered that even in the disclosed volume of business
in the year under consideration in the Head Office and
in the branches, there was possibility of his earning a
considerable sum as against which it showed a net
loss of about Rs. 46,000. The Income-tax Officer also
noticed that notwithstanding the fact that the period
was very favourable to food grains dealers, the appellant had declared a loss for the assessment year 194445 up to 1946-47, though it had the benefit of a large
capital on hand. The Income-tax Officer further took
into consideration the circumstances that Nawgachia
and Dhulian were very important business centres and
Sahibganj, the principal place of business, had gained
sufficient notoriety for smuggling foodgrains and other
aommodities to Bengal by country boats. Dhulian
which was just on the Bel)gal, Bihar border was also
reported to be a great receiving centre for such commodities. Having regard to all these circumstances,
the Income-tax Officer rejected the appellant's explanation that the high denomination notes formed part of
its cash balances and treated the sum of Rs. 2,91,000
as the appellant's secreted profits from business and
included it in its total income and assessed the appellant for the said assessment year on the income of
Rs.1,39,117. Dealing with the Excess Profits Tax
assessment, he also held that the said income was derived from the business of the appellant and hence it
was liable to excess profits tax also.
r
'
S.O.R.
SUPREME COURT REPORTS
305
I959
Lalchand BhagaJ
Ambical Ram
v.
The appellant preferred an appeal to the Appellate
Assistant Commissioner against both these assessment
orders and by his orders dated :February 28, 1951, the
Appellate Assistant Commissioner upheld the orders of
the Income-tax Officer and dismissed the appeals.
The Commission,,
On further appeals from the said orders of the Appelof Income-ta~
late Assistant Commissioner to the Income-tax Appellate Tribunal, the Tribunal by its order dated April 29,
1952, dismissed both the appeals as regards the Incometax as well as Excess profits tax. Even though before
the Income-tax Officer and the Appellate Assistant
Commissioner the case of the appellant was that the
account book which contained the entries in regard to
the receipts of moneys in high denomination notes were
genuine and correct, this position was abandoned by
the appellant before the Tribunal. Before the Tribunal,
the appellant stated that the said entries were made in
sheer nervousness after coming into force of the High
Denomination Bank Notes (Demonetization) Ordinance,
1946, on January 12, 1946, as the appellant did not
know th<1t it had specific proof in its possession of
having the high denomination notes as part of its cash
balances. The Tribunal held that there was no other
reason to suspect the genuineness of the account books
in which these interpolations were made. If the entire
account books were fabricated to serve its purpose,
there would be no need for the appellant to make
interpolations between the lines already written in a
different ink and in such an obvious manner as to
catch one's eye on the most cursory perusal. The
Tribunal, however, examined the cash book and taking
into consideration all the circumstances which had
been adverted to by the Income-tax Officer held that
the appellant might be expected to have possessed as
part of its business cash balance of at least Rs. 1,50,000
in the s~ape of high de~omination notes on January 12,
1946, when the Ordmance above-mentioned
was
promulgated.
A copy of the statement of large
amounts received by the appellant from a single
constituent had been filed by the appellant which
showed that sums aggregating to .Rs. 5,04,713 bad
been I'eceived by the appellant in large amounts
39
Bhag~ali ].
306
SUPREME COURT REPORTS [1960(1))
1959
exceeding Rs. 1,000 between February 6, 1945, and
L•lclia:,-Bhagat January 11, 1946. As to large payments made ?Y the
Ambical Ram
appellant, no statement was filed, but the Tribunal
v.
examined the accounts with a view to ascertain the
Tho Commissioner payments which could have been made in high deno0! Income·•=
mination notes. The Tribunal came to the conclusion
Bhagwali J.
that the nature of the source from which the appellant derived the remaining 141 high denomination
notes of Rs. 1,000 each remained unexplained to its
satisfaction. It accordingly ordered that the addition
made by the authorities be reduced from Rs. 2,91,000
to Rs. 1,41,000.
The Income-tax Officer was also
directed to make the necessary consequential adjustment in the Income-tax assessment based upon the
result of the connected Excess Profits Tax appeal. In
regard to the Excess Profits Tax appeal the Tribunal
after taking into account the preceding and succeeding
assessments and the nature of the appellant's business
and the opportunities that it had to make substantial
business profits outside the books held that the add
back of Rs. 1,41,000 must be made to the business
profits disclosed by the appellant.
Consequential
relief was accordingly given in the Excess Profits Tax
appeal also.
The appellant thereafter applied to the Tribunal for
stating a case and raising and referring to the High
Court the following questions of law arising from the
said order of the Tribunal both as regards the Incometax and the excess profits tax assessments:-
(1) "Whether there is any material to justify the
conclusion that Rs. 1,41,000 is secreted profit for
the purpose of assessment, this amount being a part
of Rs. 2,91,000 and which was the amount represented by high denomination notes encashed by the
Petitioner.
(2) " Whether there is any material for a finding
that the sum of Rs. 1,41,000 is the secreted value of
the high denomination notes was business income
liable to excess profits tax."
By its order dated August 15, 1952, the Tribunal
dismissed these applications stating that the finding of
the taxing authorities was a pure finding of fact based
S.C.R.
SUPREME COURT REPORTS
307
on evidence before them and that no question of law
x959
arose out of the said order of the Tribu~al..
Lalclland Bllaglll
The appellant thereupon made apphcat10ns to the
Ambical Ram
High Court under s. 66(2) for directing the Tribunal
v. . .
to state a case and raise and refer the said questions of Th~ ~ommiss;oner
law to the High Court for its decision. By its order
0
ncome·"
dated January 21, 1953, the High Court directed the
BTtagwlllif.
Tribunal to state a case and raise and refer the following question of law to the High Court for its decision
in both the applications:-
" Whether there is any material to support the
finding of the Appellate Tribunal that a sum of
Rs. 1,41,000 is secreted profit liable to be taxed in
the hands of the assessee under the Indi:;m Incometax Act and under the Excess Profits Tax Act."
The tribunal accordingly stated a case and raised
and referred the aforesaid question of law to the High
Court.
The said Reference was· heard by the High Court
and judgment was delivered on January 5, 1955,
whereby the High Court answered the referred
question in the affirmative. The High Court was of
the opinion that the onus of proving the source of the
said amount was on the appellant which the appellant did not discharge and that there was evidence
before the Tribunal to come to the conclusion it did.
The finding arrived at by the Tribunal WIJ1! therefore
a pure finding of fact and it could not be urged that
it was based on no evidence. The High Court further
held that as the appellant itself claimed that the said
amount of Rs. 2,91,000 formed part of the cash
balance of its business, the said profits were profits of
the business and as such liable to excess profits tax.
The appellant then applied to the High Court for a
certificate under s. 66A (2) of the Income-tax Act for
leave to appeal to this Court.
These applications
were rejected by the High Court on August 25, 1955,
observing that it had answered the question of law
not on the academic principles of onus but on the
material from which it was open to the Income-tax
authorities to arrive at the conclusion at which they
arrived.
308
SUPREME COURT REPORTS [1960Cl))
z959
The appellant thereupon on October 22, 1955,
applied to this Court for special leave to appeal which
La~!~~!,.a;':!"' was gr.anted by this Court on November 28, 1955, in
v.
both the appeals arising out of the assessment for
TAe Commissioner Income-tax as well as the excess profits tax. Both
of Income-tax
the appeals arising out of these orders being Civil
Appeals Nos. 679 and 680 of 1957 are now before us.
Bha:wa/; J.
The main question to determine in these two appeals
is whether there was any material to support the
finding of the Tribunal that the sum of Rs. 1,41,000
represented the secreted profits of the appellant's
business and as such liable to be taxed in the hands
of the appellant under the Indian Income-tax Act and
the Excess Profits Tax Act ?
Tl).e contention of the
Revenue all throughout has been that it is a finding of
fact reached by the authorities competent in that
behalf and this Court should not interfere with such
findings of fact.
The contention of the appellant on
the other hand, has been that even though it may be
a finding of fact to be reached by the authorities
concerned on the materials on the record before them,
such finding is vitiated by reason of the authorities
indulging in conjectures, suspicions and surmises and
basing the same on no material whatever which goes
to support the same. It is also contended that the finding reached by them is a perverse one which a reasonable body of men could not have arrived at on the
material on the record.
The limits of our jurisdiction to interfere with finding of fact reached by the courts or tribunals of facts
have been laid down by us in various decisions of this
Court. In Dhirajlnl Girdharilnl v. Commissioner of
Income-tax, Bombay (1) we observed that when a Court
of fact arrives at its decision by considering material
which is irrelevant to the enquiry, or acts on material,
partly relevant and partly irrelevant, where it is
impossible to say to what extent the mind of the
Court
was
affected by the
irrelevant material
used by it in arriving at its decision, a question of law arises:
Whether the finding of the
Court of fact is not vitiated by reason of its having
(I) [1954] 26 l.T.R. 736.
S.C.R.
SUPREME COURT REPORTS
309
relied upon conjectures, surmises and suspicions not
z959
supported by any evidence on record or partly upon L 1 ,. "" Bh "'
evidence and partly upon inadmissible material. We
11
;,,.~ical R:~
also observed in Dhakeswari Cotton .llfills Ltd. v.
v.
Commissioner of Income-tax, West Benyal (1) that an The Commissi01Ur
assessment so made without disclosing to the assessee
0! Income-tu
the information supplied by the departmental repBnagwati ].
resentative and without giving any opportunity to
the assessee to rebut the information so supplied and
declining to take into consideration all materials
which the assessee wanted to produce in support of
the case constituted a violation of the fundamental
rules of justice and called for interference on our part.
In Messrs. Metha Parikh and Co. v. The Commissioner
of Income-tax, Bombay(~) this Court observed that the
conclusions based on facts proved or admitted may
be conclusions of fact but whether a particular inference can legitimately be drawn from such conclusions
may be a question of law. Where, however, the fact
finding authority has acted without any evidence or
upon a view of the facts which could not reasonably
be entertained or the facts found were such that no
person acting judicially and properly instructed as to
the relevant law could have found, the Court is entitled to interfere. In our decision in M eenakshi Mills,
Madurai v. Commissioner of Income-f,ax, Madras (3)
after discussing the various authorities on the subject
we laid down that :-
"
(3) A finding on a question of fact is open to
attack under S. 66(1) as erroneous in law when
there is no evidence to support it or if it is
perverse."
'l'he latest pronouncement of this Court in Omar Salay
.Mohamed Bait v. The Commissioner of Income-tax,
Madras(') summarises the position thus:-
"We are aware that the Income-tax Appellate
Tribunal is a fact finding Tribunal and if it arrives
at its own conclusions of fact after due consideration of the evidence before it this Court will not
(r) (1955] 1 S.C.R. 941.
(2) [1956] S.C.R. 6i6.
(3) (1956] S.C.R. 691.
(4) C.A. No. I.5 of 1958 decided OD
March .5• 1959.
z959
Lalchand Bhagat
.A.mbical Ram
v.
T,,e Commissioner
of Ineom~-ta~
Bugwali J.
310
SUPREME COURT REPORTS [1960(1}]
interfere. It is necessary, however, that every fact
for and against the assessee must have been considered with due care and the Tribunal must have
given its finding in a manner which would clearly
indicate what were the questions which a.rose for
determination, what was the evidence pro a.nd
contra in regard to each one of them and what were
the findings reached on the evidence before it. The
conclusions reached by the Tribunal should not be
coloured by any irrelevant considerations or matters
of prejudice a.nd if there are any circumstances
which required to be explained by the assessee, the
assessee should be given an opportunity of doing so.
On no account whatever should the Tribunal base
its findings on suspicions, conjectures or surmises
nor should it a.ct on no evidence a.t all or on improper rejection of material and relevant evidence or
partly on evidence and partly on suspicions, conjectures and surmises a.nd if it does anything of the
sort, its findings even though on questions of fa.ct
will be liable to be set aside by this Court."
It is in the light of these observations that we have
to <let.ermine the question a.rising before us in the
present appeals. It is clear on the record that the
appellant maintained its books of account according to
the mercantile system and there were maintained in
its cash books two accounts : one showing the cash
balances from day to day and other known as
" Almirah account " wherein were kept large balances
which were not required for the day-to-day working
of the business. Even though the appellant kept large
a.mounts in bank deposits and securities monies were
required at short notice at different branches of the
appellant.
There were also collections made from
various Beoparies or merchants and monies were also
required for doing the grain purchase work on behalf
of the- Government. These monies were credited in
the Almirah account which showed heavy cash balances from time to time. In the books of account for
previous years it was the practice of the appellant to
give details of the notes of high denominations giving
the distinctive numbers of these notes received or paid
S.C.R.
SUPREME COURT REPORTS
311
or at least other description e.g., " So many notes " of
z959
Rs. 1,000 each.
In the assessment year, however, Lalchand Bhagat
this practice does not appear to have been followed
Ambical Ram
but entries continued to be made of monies thus
v.
received_ from the banks, different branches, Beoparees The Commissioner
etc., without any such details being filled therein. A
of lncome·lair
statment of these cash balances viz., the balance in the
Bhagwatif.
Rokar and the balance in the Almirah from September l, 1945, to January 31, 1946, was filed before the
Income-tax authorities and this statement showed that
apart from the balance in the Rokar the balance in
the Almirah rose from Rs. 1,36,397-10-0 on September l, 1945, to Rs. 1,97,397-10-0 on September 30, 1945,
to Rs. 2,23,397-10-0 on October
13,
1945, to
Rs.
2,65,397-10-0
on
November
27,
1945,
to
Rs. 2,91,397-10-0 on December 29, 1945, and remained
at Rs. 2,81,397-10-0 on January 10, 1946. The balance
in the Rokar :fluctuated considerably but on the
relevant date
January
10, 1946, it stood at
Rs. 26,092-10-9. It was Rs. 24,976-13-3 on January 11,
1946, and Rs.
29,284-3-9 on January 12,
1946,
when the High Denomination Bank Notes (Demonetization) Ordinance, 1946, was promulgated.
These
entries showed that there was with the appellant on
on January
12,
1946, an
aggregate
sum
of
Rs. 3,10,681-13-9 and it~ was highly probable that the
High Denomination notes of Rs. 2,91,000 were included in this sum of Rs. 3,10,681-13-9. The books of
account of the appellant were not challenged in any
other manner except in regard to the interpolations
relating to the number of high denomination notes of
Rs. 1,000 each obviously made by the appe,llant ip. the
accounts for the assessment year in question in the
manner aforesaid and even in regard to these interpolations the explanation given by the appellant in
regard to the same was accepted by the Tribunal.
Even though the Income-tax Officer made capital out
of the interpolations and subsequent insertions in the
books of account and styled the evidence furnished by
them as created or manipulated evidence thus. discoi.mting the story of the appellant in regard to the
source of these high denomination notes, the Tribunal
312
SUPREME COURT REPORTS [1960(1))
z959
was definitely of opinion that there was no other
L l ha d Bh
, reason to suspect the genuineness of the account
a c n
aga. b k ·
h" h h
· t
1 t•
"
Ambical Ram
oo s m w IC t ese m erpo a ions were iound. As a
v.
matter of fact the Tribunal accepted these books of
The Commissioner account as genuine and worked up its theory on the
of Income-la•
basis of the entries which obtained in these books of
account. The Tribunal had before it the statement
Bhagwati].
of large amounts received by the appellant from the
banks, different branches of the appellant and its
Beoparees or merchants which showed that between
February 6, 1945, and January 11, 1946, amounts
exceeding Rs. 1,000 aggegrating to Rs. 5,04,713 had
been received by the appellant. Even though large
amounts may have been paid out by the appellant in
this manner between the said dates, the entries of the
balance in Rokar and the balance in Almirah showed
that on January 12, 1946, the balance in Rokar was
Rs. 29,234-3-9 and the balance in Almirah was
Rs. 2,81,397-10.0 the total cash balance thus aggregating to Rs. 3,10,681-13-9. Nobody had any inkling
of the promulgation of the High Denomination Bank
Notes (Demonetization) Ordinance, 1946, on January
12, 1946, and if in the normal course of affairs and
situated as the appellant was, the appellant kept these
large cash balances in High Denomination Notes of
Rs. 1,000 each, there was nothing surprising or improbable in it. If the appellant had to disburse such large
sums of monies at short notices at the different branches
of the appellant and also to its Beoparees apart from
financing the Government for grain purchase work
which it used to carry on, it would be convenient for
it to handle these large sums of monies in high denomination notes of Rs. 1,000 each and the most natural
thing for it to do was to keep these cash balances in
as many high denomination notes as possible. The
Tribunal in fact took count of this position and after
giving due weight to all the circumstances arrived at
the conclusion that the appellant might be expected
to have possessed as part of its business cash balance
at least Rs. 1,50,000 in the shape of high denomination notes on January 12, 1946, when the Ordinance
above mentioned was promulgated. This conclusion
S.C.R.
SUPREME COURT REPORTS
313
,
of the Tribunal could only be arrived at on the basis
I959
that the entries in the books of account in regard to Lalchand Bhagat
the balance in Rokar and the balance in Almirah were
Ambical Ram
correct and represented the true state of affairs, in
v.
spite of the interpolations and subsequent insertions The Commissioner·
which had been made to bolster up the true case.
0! Income-ta:r
If these were the materials on record which would
Bhagwati J.
lead to the inference that the appellant might be
expected to have possessed as part of its cash balance
at least Rs. 1,50,000 in the shape of high denomination notes on January 12, 1946, when the Ordinance
was promulgated, 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. 1,000 each remained unexplained to its satisfaction. If the entries in the books
of account in regard to the balance in Rokar and the
balance in 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. 1,000 each which it encashed on January 19, 1946.
It was not open to the Tribunal to accept the genuineness of these books of account and accept the explanation of the appellant in part as to Rs. 1,50,000
and reject the same in regard to the sum of
Rs. 1,41,000-0-0. Consistently enough, the Tribunal
ought to have accepted the explanation of the appellant in regard to the whole of the sum of Rs. 2,91,000
and held that the appellant had satisfactorily explained the encashment of the 291 high denomination
notes of Rs. 1,000 each on January 19, 1946.
The Tribunal, however, appears to have been influenced by the suspicions, conjectures and surmises
which were freely indulged in by the ·Income-tax
Officer and the Appellate Assistant Commissioner and
arrived at its own conclusion, as it were, by a rule of
thumb holding without anY, proper materials before it
that the appellant .might be expected to have possessed
as part of its business, cash balance at least Rs. 1,50,000
in the shape of high denomination notes on January
40
314
SUPREME COURT REPORTS [1960(1)]
r959
12, 1946,- a mere conjecture or surmise for which
there was no basis in the materials on record before it.
Lalchand Bhagat
Th I
Offi
h d
·
f
Ambi,al Ram
e ncome-tax
cer a
indented m support o
v.
his conclusion the surrounding circumstances, viz., that
The Commissioner the appellant was one of the premier Arhatdars and
of Jn,om•·lax
grain merchants of Sahibganj with branches, doin~
similar business, at Nawgachia and Dhullian and all
Bhagwati f.
these places were very important business centres and
Sahibganj, the principal place of business, had gained
sufficient notoriety for smuggling foodgrains and other
commodities to Bengal by country boats, and Dhulian
which was just on the Bihar-Bengal border was
reported to be a great receiving centre for such commodities, that the foodgrains licence of the appellant
at Nawgachia was also cancelled during the accounting year for not keeping proper stock accounts and
the appellant was prosecuted under the Defence of .
India Rules but was given the benefit of doubt and
was acquitted, that the accounting year and the
year preceding it as also the year succeeding it
were very favourable for the foodgraindealers but the
appellant though he had large capital in hand declared
losses all through from 1944-45 assessment year up to
1946-47 assessment year, the loss according to its books
in the year under consideration being to the tune of
about Rs. 46,000, that t.he appellant was in very
favourable circumstances in which there was a possibility of its earning a considerable amount in the year
under consideration, that it also indulged in speculation (a loss of about Rs. 40,000 shown in Nawgachia
branch (in Kalai account)), in which profit in a single
transaction or in a chain of transactions could exceed
the amounts involved in the high denomination notes,
that even in the disclosed volume of business in the
year under consideration in the Head Office and in
branches there was possibility of its earning a considerable sum as against which showed a net loss of
about Rs. 45,000 and.that the appellant had all these
probable source or sources from which the appellant
could have earned the sum of Rs. 2,91,000 which was
represented by the high denomination notes of Rs. 1,000
each.
S.C.R.
SUPR€ME COURT R~PORTS
315
The Appellate Assistant Commissioner also empha1959
sized the said aspect but based his conclusion mainly Lalchand Bhaglll
.on the ground that the appellant had failed to prove
Ambical Ram
that the high denomination notes had their origin in
v.
capital and not in profit and held that the Income-tax The Commissioner
Officer was justified in treating the sum of Rs 2,91,000
of Income-tax
as secreted profits.
h b
h h
b
Bhafwati ].
This was t e ackground against whic t e Tri unal
came to its own conclusion. Even though it recognised that it was not improbable that when very large
sums, say in excess of Rs. 10,000 . at a time were
received, a fairly good portion thereof consisted o'fhigh
denomination notes and as high denomination notes
were valid tender and nobody could have foreseen that
they would be demonetised suddenly in January 1946,
there was nothing out of the way in persons dealing
with tens of thousands of rupees and whose balances
ran to lakhs, being in possession of a fair proportion
of their balances in the shape of high denomination
notes. While recognising this probability of the
appellant having been in possession of a fair proportion of its balances in the shape of high denomination
notes, the Tribunal unconsciously though it was, fell
into an error when it held that the appellant might
be expected to have possessed at least Rs. 1,50,000 in
the shape of high denomination notes as part of its
cash balance, thus treating the remaining Rs. 1,41,000
in the high denomination notes of Rs. 1,000 each as
outside the purview of these cash balances.
Unless the Tribunal had at the back its mind the
various probabilities which had been referred to by
the Income-tax Officer as above it could not have come
to the conclusion it did that the balance of Rs 1,41,000
comprising of the remaining 141 high denomination
notes of Rs. 1,000 each was not satisfactorily explained
by the appellant.
If the entries in the books of account were genuine
and the balance in Rokar and the balance in Almirah
on January 12, 1946, aggregated to Rs. 3,10,681-13-9
and if it was not improbable that a fairly good portion
of the very large sums received by the appellant
from time to time, say in excess of Rs. 10,000 at a time
316
SUPREME COURT REPORTS [1960(1)]
I959
consisted of high denomination notes, there was no
Lalchcmd Bhagat basis for the conclusion that the appellant had satisAmbical Ram
factorily explained the possession of Rs. 1,50,000 in,
v.
the high denomination notes of Rs. 1,000 each leaving
The Commissioner the possession of the balance of 141 high denominao/ Income-ta•
tion notes of Its. 1,000 each unexplained. Either the
Bhagwati J.
Tribunal did not apply it§ mind to the situation or it
arrived at the conclusion it did merely by applying the
rule of thumb in which event the finding of fact reached by it was such as could not reasonably be entertained or the fact found. were such as no person acting
judicially and properly instructed as to the relevant
law could have found, or the Tribunal in arriving at
its findings was influenced by irrelevant considerations
or indulged in conjectures, surmises or suspicions in
which event also its finding could not be sustained.
Adverting to the various probabilities which weighed with the Income-tax Officer we may observe that
the notoriety for smuggling foodgrains and other
commodities to Bengal by country boats acquired by
Sahibgunj and the notoriety achieved by Dhulian as a
great receiving centre for such commodities were
merely a background of suspicion and the appellant
could not be tarred with the same brush as every
Arhatdar and grain merchant who might have been
indulging in smuggling operations, without an iota
of evidenec in that behalf. The cancellation of the
foodgrain licence at Nawgachia and the prosecution of
the appellant under the Defence of India Rules was
also of no consequence inasmuch as the appellant1 was
acquitted of the offence with which it had been charged
and its licence also was restored. The mere possibility
of the appellant earning considerable amounts in the
year under consideration was a pure conjecture on the
part of the Income-tax Officer and the fact that the
appellant indulged in speculation (in Kalai account)
could not legitimately lead to the inference that the
profit in a single transaction or in a chain of transactions could exceed the amounts, involved in the high
denomination notes,-this also was a pure conjecture
or surmise on the part of the Income-tax Officer.
As
regards the disclosed volume of business in the year
S.C.R.
SUPREME COURT REPORTS
317
under consideration in the Head Office and in branches
I959
the Income-tax Officer indulged in speculation when
he talked of the possibility oft.he appellant earning a Lalchand Bhagat
Ambical Ram
considerable sum as against which it showed a net loss
v.
of about Rs. 45,000. The Income-tax Officer indicated The Commissioner
the probable source or sources from which the appelof Income-tax
lant could have earned a large amount in the sum of
Rs. 2,91,000 but the conclusion which he arrived at in
Bhagwati J.
regard to the appellant having earned this large
amount during the year and which according to him
represented the secreted profits of the appellant in its
business was the result of pure conjectures and
surmises on his part and had no foundation in fact
and was not proved against the appellant on the record
of the proceedings. If the conclusion of the Income-tax
Officer was thus either perverse or vitiated by suspicions, conjectures or surmises the finding of the Tribunal
was equally perverse or vitiated if the Tribunal took
count of aH these probabilities and without any rhyme
or reason and merely by a rule of thumb, as it were,
came to the conclusion that the possession of 150 high
denomination notes of Rs. 1,000 each was satisfactorily
explained by the appellant but not that of the balance
of 141 high denomination notes of Rs. 1,000 each.
The position as it obtained in this case was closely
analogous to that which obtained in Messrs. J.V!ehta
Parikh & Go. v. The Commissioner of Income-tax,
Bombay (1).
In that case the assessee had to satisfactorily explain the possession of 61 High Denomination Notes of Rs. 1,000 each and the Tribunal
came to the conclusion that the assessee had satisfactorily explained the possession of 31 of these notes and
not of the remaining 30. The High Court had treated
the finding of the Tribunal as a finding of fact. It was
held by this Cpurt that the entries in cash-book and
the statements made in the affidavit in support of the
explanation, which were binding on the Revenue and
could not be questioned, clearly showed that it was
quite within the range of possibility that the assessee
had in their possession the 61 High denomination notes
o'n the relevant date and their explanation in that
(1) [1956) S.C.R. 626.
'
318
SUPREME COURT REPORTS [1960(1)]
r959
behalf could not be assailed by a purely imaginary
calculation of the nature made by the income-tax
Lalchand Bhagat
Ambical Ram
Officer or the Appellate Assistant Commissioner.