Income-tax---

----Accounting---Rejection of accounts---Estimate of income---Tribunal justified in holding that books of account should not again be relied on for working out peak credit.

The assessee had returned a loss for the assessment year 1973-74 being his share income from a firm. The Income-tax Officer found that in the assessment for 1972-73, the assessee became the proprietor of the business. The Income-tax Officer assessed the business income at Rs.3,75,000. The Income-tax Officer found that in the capital account according to the balance sheet there was a credit of Rs.3,54,110. But according to the seized books the credit worked out to Rs.4,47,741. Since no explanation had been offered for this credit, the Income-tax Officer added this amount of Rs.4,47,741 to the income of the assessee under the head "other sources". In the opinion of the Appellate Assistant Commissioner, since the Income-tax Officer had not relied on the books seized from the assessee's premises for the purpose of estimating the business income, there was no reason why he should depend upon these books for working out the peak credit. The Appellate Assistant Commissioner, therefore, held that the cash credits as found in the capital account of the

assessee according to the balance-sheet, i.e., Rs.3,54,110 should be taken for the purpose of considering it as income of the assessee under "other sources". In that view of the matter, he gave a reduction of Rs.93,631 being the difference between Rs.4,47,741 and Rs.3,54,110. The Tribunal confirmed the order passed by the Appellate Assistant Commissioner. On a reference:

Held, that the conclusion was arrived at by the First Appellate Authority and the Tribunal on the basis of the facts and circumstances arising in this case. The Tribunal was justified in directing the Income-tax Officer to accept the amount of Rs.3,54,110 towards unexplained cash credit.

CIT v. Devi Prasad Vishwanath Prasad (1969) 72 ITR 194 (SC); CIT v. Maduri Rajaiahgari Kistaiah (1979) 120 ITR 294 (AP) and Kale Khan Muhammad Hanif v. CIT (1963) 50 ITR 1 (SC) ref.

C. V. Rajan for the Commissioner.

Mrs. Pushya Seetharaman for the Assessee.

JUDGMENT

THANIKKACHALAM, J. ---At the instance of the Department, the Tribunal referred the following two questions for the opinion of this Court under section 256(1) of the Income-tax Act, 1961:

"(1)Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the Appellate Assistant Commissioner was justified in confining the income under the head other sources' to Rs.3,54,110 as found in the capital account of the assessee instead of the peak credit of Rs.4,47,471 as per books?

(2)Whether the Appellate Tribunal's view that the Income-tax Officer having rejected the books of account while determining the income from business, should not have relied upon the same books of account for the purpose of making addition towards unexplained credit under the head 'other sources' is sustainable in law?"

The assessee is an individual. The assessment relates to the year 1973-74. The accounting year is the year ended March 31, 1973. The assessee failed to comply with the notice issued by the Income-tax Officer under section 1420). Accordingly, assessment was completed under section 144. The assessee had earlier returned a loss of Rs. 5,65,654 being his share income from the firm, East Coast Sea Food Corporation, Madras. The Income-tax Officer found that in the assessment for 1972-73, the assessee became its own proprietor and as such he was carrying on the business in his individual capacity from February 6, 1972, onwards. Hence, the Income-tax Officer held that the assessee carried on the business in the name and style of East Coast Sea Food Corporation, Madras. The statements were filed along with the return for the purpose of computing the income of the assessee. The Income-tax Officer assessed the business at Rs.3,75,000. Thereafter, under the head of "other sources", he found that in the capital account as per the balance-sheet there was a credit of Rs.3,54,110. But as per the seized books the book credit worked out to Rs.4,47,741. Since no explanation has been offered for this credit, the Income-tax Officer added this to the income return. The Income-tax Officer also found that a sum of Rs.75,000 was deposited on March 28, 1973, in Dena Bank and the assessee was unable to explain as to how this amount came to be deposited in his name in Delhi. The Income-tax Officer, therefore, added this also to the income.

On appeal, the Appellate Assistant Commissioner found that, as far as the addition of Rs.4,47,741 was concerned, the Income7tax Officer had relied on the seized books whereas for the purpose of estimating the business income he held that as the accounts were not properly closed and adjusted, the assessee's books seized could not be relied upon. In the opinion of the Appellate Assistant Commissioner, since the Income-tax Officer had not relied on the books seized from the assessee's premises for the purpose of estimating the business income, there was no reason why he should depend upon these books for working out the peak credit. The Appellate Assistant Commissioner, therefore, held that the cash credit as found in the capital account of the assessee as per the balance-sheet, i.e., Rs. 3,54,110, should be taken for the purpose of considering it as income of the assessee under "other sources". In that view of the matter, he gave a reduction of Rs.93,631, being the difference between Rs.4,47,741 and Rs.3,54,110.

Aggrieved by the order of the Appellate Assistant Commissioner, the Department preferred an appeal before the Appellate Tribunal. The Tribunal confirmed the order passed by the Appellate Assistant Commissioner.

Learned standing counsel appearing for the Income-tax Department submitted that the Tribunal was not correct in stating that the Income-tax Officer went wrong in relying on the account books for the purpose of taking the peak credits while the said account books were rejected for the purpose of ascertaining the business income. According to learned standing counsel, the Income-tax Officer is perfectly justified in relying upon the rejected account book for making additions with regard to unexplained cash credits. In support of his contention, learned standing counsel relied upon the decision of the Supreme Court in the case of Kale Khan Muhammad Hanif v. CIT (1963) 50 ITR 1, wherein the Supreme Court while considering the provisions of sections 34 and 66 of the Indian Income Tax Act, 1922, held that the amounts of the cash credits could be assessed to tax as income from undisclosed sources, in addition to the business income computed by estimate. The taxing authorities were not precluded from treating the amounts of the credit entries as income from the disclosed sources simply because the entries appeared in the books of a business whose income they had previously computed on a percentage basis. Yet another decision relied upon by learned standing counsel for the Department is the case in CIT v. Maduri Rajaiahgari Kistaiah (1979) 120 ITR 294 (AP), wherein the Court held that where certain unexplained cash credits are found in the account books of the assessee, whose business income is determined on estimate basis and not on the basis of his returned income, the Income-Tax Officer is not prevented from treating the unexplained cash credits standing in the books of account as income from undisclosed sources which falls under the head "Income from other sources" unless the assessee, by independent and satisfactory evidence, establishes that the said cash credits are referable to the very same business the income of which has been determined on estimate basis. Lastly, learned standing counsel relied upon the decision of the Supreme Court in CIT v. Devi Prasad Vishwanath Prasad (1969 72 ITR 194, wherein the Supreme Court held that there is nothing in law which prevents the Income-tax Officer in an appropriate case in taxing both the cash credit, the nature and source of which is not satisfactorily explained, and the business income estimated by him under section 13 of the Indian Income-Tax Act, 1922, after rejecting the books of account of the assessee as unreliable. Therefore, according to learned standing counsel, the reasons given by the Tribunal for directing the Income-tax Officer to adopt the lesser figure of Rs.3,54,110 as unexplained cash credit is unsustainable.

On the other hand, learned counsel appearing for the assessee while supporting the order passed by the Tribunal contended that when the Income tax Officer rejected the books of account as defective, there is no reason for him to rely upon the rejected account books for working out the peak credit while determining the unexplained cash credit. Accordingly, it was submitted that the Department was not correct in stating that the peak credit should be adopted as unexplained cash credit instead of the amount found in the balance-sheet.

The fact remains that the assessee's business income was estimated after rejecting the account books filed by the assessee since they are defective. For determining the unexplained cash credit, the Income-tax Officer relied upon the rejected account books. There is no objection for the proposition that the Income-tax Officer can rely upon the rejected account books for the purpose of making additions towards unexplained cash credit. In the present case, the assessee filed a balance-sheet showing a sum of Rs.3,54,110 in the capital account. The Appellate Assistant Commissioner and the Tribunal held that when the assessee furnished a balance-sheet it is not reasonable on the part of the Department to work out a peak credit on the basis of the rejected account books for making additions in respect of unexplained cash credits. The Tribunal never said that the Income-tax Officer has no power or jurisdiction to rely upon the rejected account books for the purpose of making additions towards unexplained cash credit. What all the Tribunal pointed out was that when the Income-tax Officer rejected the account books as defective while determining the business income of the assessee, on the basis of the same account books it is not reasonable on his part to work out the peak credit. Nothing was said against the law on this aspect. The conclusion was arrived at by the first appellate authority and the Tribunal on the basis of the facts and circumstances arising in this case. Since this finding was arrived at on the basis of the facts, we consider that there is no infirmity in the order passed by the Tribunal in directing the Income-tax Officer to accept the amount of Rs. 3,54,110 towards unexplained cash credit. Accordingly, we answer the questions referred to us in the affirmative and against the Department. There will be no order as to costs.

M. B. A./1276/FCReference answered.