Ratnam, J.@mdashThe assessee is the proprietor of a rice mill and has been carrying on the business of purchasing and selling paddy, rice and
gunny bags. For the assessment year 1965-66, the assessee submitted a return on July 30, 1965, disclosing a total income of Rs. 44,997 from his
business. During the course of the assessment proceedings, the ITO noticed that the entries in the accounts of the assessee revealed that on
December 16, 1964, five hundi loans of Rs. 20,000 each had been advanced to the assessee by five bankers, Atmaram Rupchand, Nandlal
Tikamdas, Shamlal Maheshlal, Gopaldas Sugnichand and Paramanand Kishindas and that a sum of Rs. 4,050 has also been paid to them towards
interest on these borrowings. Since the assessee did not furnish satisfactory proof of the genuineness of these hundi transactions which figured in his
account books, the ITO treated the sum of Rs. 1,00,000 as income from undisclosed sources and computed the total income of the assessee at
Rs. 1,27,000. On appeal by the assessee before the AAC, the assessment order was set aside with a direction that an opportunity should be given
to the assessee to explain the hundi transactions. Subsequently, the ITO gave a number of opportunities to the assessee to establish that the
transactions reflected in the account books are true and genuine.
2. The assessee wrote a letter on February 18, 1971, stating that the hundi transactions were true and genuine and should be accepted. However,
the assessee was required to produce the bankers and their books of account for examination. The assessee was also informed that in the event of
the assessee experiencing difficulty in producing the creditors by himself, their personal appearance could be enforced by the issue of summons
under s. 131 of the I.T. Act, 1961 (hereinafter referred to as ""the Act"" ), for examination as witnesses on behalf of the assessee. Accordingly,
summons were issued to all the five bankers to their address. Except for the summons issued to one Paramanand Kishindas, the others were all
returned undelivered with the endorsement ""not known"". Paramanand Kishindas appeared before the ITO on February 7, 1972, and stated that
though he had signed the hundi papers for Rs. 20,000 as a creditor, he had not advanced any loan as a money-lender, but had acted as a mere
name lender for a nominal consideration. Thereafter, the ITO proceeded to consider the available materials in regard to each one of the hundi
loans.
3. Regarding Atmaram Rupchand, it was seen that he had a credit advance of only Rs. 452.77 on December 16, 1964, when he was stated to
have advanced Rs. 20,000 to the assessee. It transpired that a sum of Rs. 20,000 had been deposited in cash on December 17, 1964, and the
cheque issued to the assessee had also been encashed on December 17, 1964. Since the books of account of Atmaram Rupchand were not
produced, the ITO could not verify the source for the sum of Rs. 20,000 deposited in cash into the account of Atmaram Rupchand on December
17, 1964. In view of these, the ITO proceeded to conclude that the assessee had not established this loan as the banker had not the means to
advance Rs. 20,000 to the assessee. Adverting to the repayment of Rs. 20,000 stated to have been made by the assessee to the banker by
cheque dated March 16, 1965, the ITO found that this was not credited to the account of the banker, but the bearer cheque issued had been
encashed on March 16, 1965, so that the ultimate destination of the proceeds of the cheque could not be verified. Likewise, with reference to
Nandlal Tikamdas, Shamlal Maheshlal and Gopaldas Sugnichand also, it was found that the bankers did not have sufficient funds on December 16,
1964, that a sum of Rs. 20,000 in cash had been deposited into their accounts and the cheques encashed and the repayments said to have been
made by cheques were not found credited to the accounts of the bankers, but had been encashed so that their destinations were not traceable. In
the case of Nandlal Tikamdas and Gopaldas Sugnichand, the bank accounts had been closed on December 26, 1964, and January 5, 1965, long
prior to the repayment by the assessee by cheque on March 16, 1965. Regarding Paramanand Kishindas, who was the only creditor examined,
the assessee stated that he had received from him a loan of Rs. 20,000 by cheque dated December 16, 1964, on the Indian Bank, Sowcarpet
Branch, Madras. On verification, it was found that the banker did not have any account with that bank. However, a cheque had been issued to the
assessee on December 16, 1964, on Galada Bank Limited, on which day there was a credit balance of only Rs. 190,35. In the case of that banker
also, it transpired that a sum of Rs. 20,000 had been deposited in cash on December 17, 1964, and the cheque was encashed on December 18,
1964. The repayment stated to have been made by the assessee to this banker on March 16, 1965, was not credited to any bank account of that
banker, but the cheque had been directly encashed on March 16, 1965, and it was found that this banker had closed his account with Galada
Bank Limited as early as December 28, 1964. Besides, the statement of Paramanand Kishindas dated February 7, 1972, indicated that the sum of
Rs. 20,000 had been paid by the assessee to him in case to enable him ostensibly to issue a cheque for Rs. 20,000 as loan and that the cheque
issued towards repayment had not been encashed by him. An affidavit filed sworn to by a finance broker, Chaturbhuj Chabaria, on July 19, 1969,
disclosed that he had arranged for the loans for the assessee from the bankers and all the loans had been paid by cheques and had also been
repaid by the assessee by cheques which passed through him. It was also stated in the affidavit that the commission had been paid to him by
cheque and a receipt had been issued by him and further that the commission paid had also been accounted for in the books of account. On a
letter from the assessee, Chaturbhuj Chabaria was summoned and examined on July 25, 1973, and also cross-examined. Chaturbhuj Chabaria
produced a jokam book to establish to establish that he had arranged loans for the assessee from the five hundi bankers on December 16, 1964,
and stated that the loans had been obtained for the assessee and vice versa. He admitted that he did not maintain any other account book and that
the book produced did not contain any entry with reference to the commission received for arranging the five loan transactions. Taking into
account the broker''s conflicting statements in the affidavit and in his examination, the ITO did not think to fit to place reliance on the version of the
finance broker. Therefore, he concluded that the hundi loan transactions in question were fictitious ones intended to introduce the income of the
assessee from undisclosed sources and to inflate expenditure under the guise of payment of interest. Considering the gross peak credit of similar
loans amounting to Rs. 30,000 which appeared in the preceding year of assessment 1964-65 and dealt with under the reassessment of the
assessee''s total income for that year, the ITO treated Rs. 70,000 as income from undisclosed sources and disallowed the payment of interest of
Rs. 4,050 claimed as business expense.
4. Aggrieved by this, the assessee preferred an appeal and the AAC sustained the addition and disallowance of interest and dismissed the appeal.
5. On further appeal by the assessee to the Tribunal contending that there was no justification for treating the sum of Rs. 70,000 as income of the
assessee from undisclosed sources and that the materials placed by the assessee established that the loans and the repayment thereof and the
payment of interest thereon, were all genuine transactions, the Tribunal concluded that, on the materials, it is established that the loan transactions
are true and genuine and that this is also further reinforced by the discharge of all these loans by the assessee by raising a loan from his bank. In this
view, the Tribunal directed the deletion of the addition of Rs. 70,000. By a separate order on a petition filed by the assessee, the Tribunal also
deleted the addition of Rs. 4,050 being the interest stated to have been paid by the assessee on the hundi loans.
6. At the instance of the Revenue, the following two questions have been referred for the opinion of this court :
(1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in deleting the entire hundi credits addition of Rs.
70,000 made by the Income Tax Officer for the assessment year 1965-66 in the light of section 68 of the Income Tax Act, 1961 ?
(2) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in deleting the addition of Rs. 4,050 made by the
Income Tax Officer representing interest alleged to have been paid on hundi loans for the assessment year 1965-66 ?
7. The learned counsel for the Revenue contended that the Tribunal had not borne in mind the requirements of s. 68 of the Act and had misdirected
itself in law in proceeding to hold that the mere entries in the books f account would be sufficient to establish the genuineness of the transactions,
when there was no material either as regards the identity of the creditor or his capacity for advancing loans. In this connection, the learned counsel
referred to the decisions in KALE KHAN MOHAMMAD HANIF Vs. COMMISSIONER OF Income Tax, MADHYA PRADESH AND
BHOPAL., , A. D. Jayaveerapandia Nadar Vs. Commissioner of Income Tax, Madras, , Velji Deoraj and Co. Vs. Commissioner of Income Tax
Bombay City II, , Shankar Industries Vs. Commissioner of Income Tax, Central, and C. Kant and Co. Vs. Commissioner of Income Tax, . It was
the further contention of the learned counsel that on the materials placed before the Tribunal, the view taken by it was one which could not
reasonably be entertained by any Tribunal acting judicially.
8. On the other hand, the learned counsel for the assessee submitted that the question dealt with and decided by the Tribunal would be principally
one of fact and in the absence of a specific reference regarding the question whether the conclusion arrived at by the Tribunal is supported by the
materials on record, it would not be open to the Revenue to assail those conclusions. In answer to this, the learned counsel for the Revenue stated
that even in the application for reference, the question whether the finding of the Appellate Tribunal is based on valid and proper materials and is a
reasonable view to take on the facts and in the circumstances of the case, was also raised, but this court had thought it fit to refer only to two
questions set out earlier and had not dismissed the application for reference in relation to the other questions and, therefore, that question can also
be considered by this court. Alternatively, it was also contended by the counsel for the Revenue that the first question referred was wide enough to
include an examination of the sustainability of the conclusions arrived at by the Tribunal as based on valid and proper materials and a reasonable
one on facts.
9. Before entering upon a consideration of these rival submissions, we would first deal with the objection based on the framing of the question. The
order in T.C. Ps. Nos. 184 and 185 of 1976, dated January 4, 1977, shows that the Revenue had sought a reference on the question relating to
the finding of the Tribunal being based on valid and proper materials and also being a reasonable view to be taken on the facts. We find from the
order that the application had not been dismissed or finally disposed of with reference to that question. Even otherwise, the question referred is,
whether the deletion of the hundi credits is right. The deletion by the Tribunal was based on the finding arrived at by it with reference to the truth
and genuineness of the loans on the materials placed before it. If that finding is not supported by the materials or is perverse or opposed to the
materials or is not a reasonable one to be arrived at on the facts and circumstances, then the deletion cannot be sustained. Thus, in dealing with the
question of the propriety of the deletion, these related aspects have also to be considered. We are of the view that question No. 1 as framed is
wide enough to include the question whether on the materials the view taken by the Tribunal regarding, deletion was a reasonable one on the facts
and in the circumstances. We, therefore, proceed to consider the questions referred bearing in mind the aforesaid aspect as well.
10. We may briefly refer to s. 68 of the Act which runs as under :
Whether any sum is found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the
nature and source thereof or the explanation offered by him is not, in the opinion of the Income Tax Officer, satisfactory, the sum so credited may
be charged to Income Tax as the income of the assessee of that previous year.
11. This section requires the assessee to prove the transactions resulting in a cash credit in his books of account. That would mean that the
assessee has to establish the identity of the creditor, the capacity or the financial ability of the creditor to advance the amount and the genuineness
of the transaction in spite of entries to that effect in the account books. If the assessee does not offer any explanation about the nature and source
of the cash credits or the explanation offered is not satisfactory, then the cash credit may be charged to Income Tax as the income of the assessee
of that previous year. In considering the scope of this section, particularly in cases where book entries are found, the Supreme Court in KALE
KHAN MOHAMMAD HANIF Vs. COMMISSIONER OF Income Tax, MADHYA PRADESH AND BHOPAL., , pointed out that the
taxing authorities are not precluded from treating the amounts of the credit entries as income from undisclosed sources simply because the entries
appeared in the books of a business whose income had been computed by the authorities. To similar effect is the decision in A. D.
Jayaveerapandia Nadar Vs. Commissioner of Income Tax, Madras, , where it has been pointed out that it is incumbent on the assessee to
establish by evidence that the loan transactions are not fictitious ones and that would involve an examination of the circumstances under which the
loan was taken or the capacity of the parties who possess funds requisite for that purpose and that apart from entries in the books of account, it
was the duty of the assessee to show that the person whose name found recorded in the accounts is the real person '' as, otherwise, any entry can
be made in the books of assessee and passed off as a genuine transaction with impunity. In Velji Deoraj and Co. Vs. Commissioner of Income
Tax Bombay City II, , it was pointed out that the duty of an assessee under s. 68 of the Act cannot be stated to be discharged merely be showing
an entry appearing in the account of a third party and that the party in whose name the amount is credited is not a fictitious party but a real party,
but he has also to further prove that the entry made in the account books is a genuine entry. In Shankar Industries Vs. Commissioner of Income
Tax, Central, , while dealing with the scope of the duty of the assessee in cases of cash credits in the names of third parties, it was held that the
assessee has to prove the transaction which results in a cash credit in his accounts and such proof would include proof of the identity of his
creditor, the capacity of such creditor to advance the money and the genuineness of the transaction and only after these things are established by
the assessee by adducing evidence in support thereof, the onus shifts to the Department and that where the assessee merely established the identity
of the creditor and nothing more, the cash credits can be treated as the income of the assessee from undisclosed sources. Again, in C. Kant and
Co. Vs. Commissioner of Income Tax, , the principles laid down in Shankar Industries Vs. Commissioner of Income Tax, Central, , were
reiterated.
12. Bearing the aforesaid principles in mind, we proceed to examine briefly the materials and also the finding arrived at on those materials by the
Tribunal. The assessee claimed that there were five creditors who had advanced hundi loans to him. Al of them were summoned but only one of
them, namely, Paramanand Kishindas, was available. There was no other material from which it could be established that there were four creditors
who had advanced Rs. 20,000 each to the assessee by way of hundi loans. Even so, the Tribunal stated as under :
We find that there is no difficulty in holding that the five creditors are not persons who are not in existence.
13. On the basis of what material the Tribunal came to this conclusions is not very clear. There was nothing to establish that the other creditors
were in existence and were also genuine creditors. The Tribunal proceeded to state that ""One of them, Paramanand, has been examined by the
Income Tax Officer"". No doubt, this is correct. But, what is the inference that can reasonably be drawn from his examination will be adverted to a
little later. The Tribunal proceeded further to state :
The others were also those who had given general and vague statements that they were all dealing in hawala transactions"".
14. We searched the record for the general and vague statements attributed to the order four creditors, but we could not find any. We are unable
to understand this observation of the Tribunal as meaning that the assessee had established the existence of the other four creditors and the hundi
loans advanced by them. The Tribunal refers to what it calls not an uncommon feature, namely, the absence of the four bankers at the address
given in the summons sent after six years. The absence of the four creditors at the address given in the summon would neither establish their identity
nor their financial ability to advance the loans. That cannot also establish that the so-called hundi advances stated to have been made by them are
genuine. No material was placed by the assessee to show the existence of these four bankers. There is, therefore, no proof of the identity of the
four creditors, their capacity for advancing the amounts as claimed by the assessee as well as the genuineness of the four hundi transactions at their
instance.
15. With reference to the only other creditor, Paramanand Kishindas, the Tribunal stated :
On going through the entire answers given by the said party, we are not impressed with his evidence as one intending to give the truth. His
answers are very evasive and very vague and we do not attach much importance to this statement.
16. The statement of the only creditor who had been examined has thus been discarded and it has necessarily to be inferred that this creditor is a
bogus one. In spite of it, the Tribunal proceeds to state :
The fact that a deposit of Rs. 20,000 is found in their accounts itself is proof that this amount was available with them for issue of the cheque to
the assessee. Who has put the deposit to enable them to issue the cheque is a question on which it is the bankers who should be in the know of
things. If it was really the assessee''s money, a banker dealing in hawala transaction would not have hesitated to say that the money had come from
the assessee. In fact, in the case of Paramanand Kishindas, we find discreet silence on the part of the banker in that regard.
17. This approach of the Tribunal is plainly erroneous as a mere entry in the account books with reference to the availability of funds is no proof of
either the identity of the creditor or his capacity for advancing the amount or even the genuineness of the hundi loans as pointed out by the
decisions referred to earlier. In addition, the Tribunal states that it is within knowledge of the bankers as to who deposited these amounts in their
accounts. Even assuming that that is correct, there is no material in this regard to disclose such knowledge in respect of four of the bankers and the
statement of the only other banker, who had been examined by the assessee had been discarded. That would mean that the bankers did not know
who deposited the amounts. The conclusion is, therefore, irresistible that it should have been only the money of the assessee. The bankers,
according to the Tribunal, would not have hesitated to say that the money had come from the assessee, if really it came from him. With reference to
four of the creditors, their hesitation was so great and such that they had made themselves scarce and whatever was stated by the only other
creditor had been discarded by the Tribunal. It is, therefore, obvious that there was no material at all that the bankers were in existence, that they
had the wherewithal to lend moneys to the assessee by way of hundi loans and that the entries in the books of account are genuine ones. That other
persons were behind the hawala bankers who had known the source of deposits made, does not appear to be borne out by the record. It does not
appear that this is based on any material. The position on the materials, therefore, is that there is no proof of the identity of four of the creditors or
their capacity for advancing funds or of the genuineness of the entries in the books of account. With reference to the only other creditor, the
Tribunal had rejected whatever he had to say with reference to the advance of Rs. 20,000 on hundi loan to the assessee. The result of this is that
there is no material to show the advance of Rs. 1,00,000 by these five bankers as and by way of genuine hundi loans.
18. The Tribunal, in arriving at the ultimate conclusion it did, was influenced by what it called the ""strong terms"" of the broker''s evidence, who is
said to have arranged these loans for the assessee and even handed over the cheques of interest in favour of the bankers. The Tribunal also
proceeded on the basis that the broker had acknowledged the receipt of commission from the assessee and deposited the cheques for commission
into his account. The receipt had not been produced by the assessee. Here, the Tribunal had taken a view which could not be reasonably
entertained, In the affidavit dated July 22, 1969, the broker had stated in paragraph 4 that in respect of the commission paid by cheque to him for
arranging there hundi loans, he had issued a receipt and had also accounted for the same in his books of account. It was also further stated by him
that these amounts were repaid by the assessee by cheques drawn in favour of the bankers through him and the cheques were encashed by the
bankers through their respective banks. However, in the course of his examination on July 25, 1973, the deponent to the affidavit was obliged to
admit that the receipt of the commission was not accounted for in his account books (jokam book). He was also positive that he did not maintain
any other book than the jokam book in respect of the hundi loans arranged by him on behalf of the assessee. The Tribunal was fully aware of the
conflicting versions given by the broker in the affidavit and in the course of his later examination. If the Tribunal had wanted to accept the earlier
affidavit, it could have said so. Otherwise, it as open to the Tribunal to have relied on the later statement of the broker to conclude that the hundi
transaction were put through the broker as claimed by him. Unfortunately, the Tribunal has not done either, but has stated that the contradiction
does not take away the veracity of the question. In the absence of the rejection by the Tribunal of either the affidavit of the broker or his statement,
the Tribunal, on the admitted conflict in the versions of the broker, could not have reasonably come to the conclusion that the alleged hundi loans
which the assessee had from the bankers are true and genuine. The Tribunal proceeds to rely upon the discharge of the loans borrowed under the
hundis by raising a loan from his bank. The undisputed fact is that though the assessee is stated to have repaid the hundi loans borrowed by means
of cheques by raising a loan, yet it is seen that some of the bankers had long prior to the repayment, closed their bank accounts or the bearer
cheques issued had been encashed with the result that there is no knowing that the assessee paid back the bankers the amounts stated to have
been advanced by them to the assessee by way of hundi loans. This also renders the affidavit of the broker to the effect that the bankers realised
the cheques given towards repayment of the loans through their respective banks unacceptable and unreliable to infer repayment of the loans by the
assessee.
19. Thus, on the materials, it is manifest that the Tribunal had acted without materials and on a view, of facts which could be reasonably
entertained. It is worthwhile, in this connection, to recall the observations of Lord Radcliffe in Edwards (Inspector of Taxes) v. Bairstow [1955] 3
WLR 410; 28 ITR 579 (Headnote) :
No person acting judicially and properly instructed as to the relevant law could have come to the determination reached; the court may then
intervene, having no option but to assume that some misconception of law is responsible for the decision.
20. Equally, the observations of Viscount Simonds and Lord Reid in Griffiths v. J. P. Harrison (Watford) Ltd. [1965] 58 ITR 328 ; 40 TC 281
are apposite. At page 336 of 58 ITR, Viscount Simods observed :
My Lords, when the question is asked whether there was evidence upon which the commissioners could arrive at their findings, I take it that this
means whether (to adopt the words of my noble and learned friend, Lord Radcliffe, in Edwards v. Bairstow [1955] 28 ITR 579 the contrary
conclusion is the true and only reasonable one. This can only be determined by a close scrutiny of the evidence led before the Commissioners.
21. At page 341, Lord Reid stated as follows :
Where, as in this case, the question is a question of fact, that means that the decision of the commissioners cannot be reviewed by the Court. But
if the decision of any Tribunal on a question of fact is unreasonable, looking to the facts on which it is based, the court can and must intervene.
22. On the facts, the Tribunal arrived at a conclusion which could not reasonably be entertained while dealing with the matter after being properly
instructed as to the relevant law and while acting judicially. We, therefore, answer the first question referred to us in the negative and in favour of
the Revenue.
23. The answer to the second question depends upon the answer to the first, and since we have held that the Tribunal was not right in deleting the
hundi credits addition of Rs. 70,000, the Tribunal was in error in deleting the addition of Rs. 4,050 representing the interest alleged to have been
paid by the assessee on the hundi loans. We, therefore, answer the second question also in the negative and in favour of the Revenue. The
Revenue will be entitled to the costs of this reference. Counsel''s fee Rs. 500.
