JUDGMENT
Thanikkachalam, J.
1. At the instance of the Department, the Tribunal referred the following two questions for the opinion of this Court under s. 256(1) of the IT Act, 1961 :
“(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the AAC 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. 4,47,741 as per books ?
(2) Whether the Tribunal’s view that the ITO 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 ?”
2. The assessee is an individual. The assessment relates to the year 1973-74. The accounting year is the year ended 31st March, 1973. The assessee failed to comply with the notice issued by the ITO under s. 142(1). Accordingly, assessment was completed under s. 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 ITO found that in the assessment for 1972-73, the assessee became its sole proprietor and as such he was carrying on the business in his individual capacity from 6th Feb., 1972, onwards. Hence, the ITO 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 ITO 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 ITO added this to the income return. The ITO also found that a sum of Rs. 75,000 was deposited on 28th March, 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 ITO, therefore, added this also to the income.
On appeal, the AAC found that, as far as the addition of Rs. 4,47,741 was concerned, the ITO 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 AAC, since the ITO 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 AAC, 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 AAC, the Department preferred an appeal before the Tribunal. The Tribunal confirmed the order passed by the AAC.
3. Learned standing counsel appearing for the IT Department submitted that the Tribunal was not correct in stating that the ITO 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 ITO is perfectly justified in relying upon the rejected account books 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 Mohammad Hanif vs. CIT (1963) 50 ITR 1 (SC), wherein the Supreme Court while considering the provisions of ss. 34 and 66 of the Indian IT 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 undisclosed 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 vs. Maduri Rajaiahgari Kistaiah , 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 ITO 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 vs. Devi Prasad Vishwanath Prasad , wherein the Supreme Court held that there is nothing in law which prevents the ITO 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 s. 13 of the Indian IT 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 ITO 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 ITO 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.
4. 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 ITO relied upon the rejected account books. There is no objection for the proposition that the ITO can reply 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 AAC 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 ITO 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 ITO 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 ITO 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.
