JUDGMENT
Ajit K. Sengupta, J.
1. In this reference under Section 256(1) of the Income-tax Act, 1961, the following questions of law have been referred to this court for the assessment year 1976-77 :
“1. Whether, on the facts and in the circumstances of the case, the Tribunal’s findings that the assessee had paid cash for purchase of shares and that it was not able to show how it was provided and that the concern from whom loan was taken did (not) have enough to lend the assessee are perverse and based on no materials and/or were arrived at by ignoring relevant materials ?
2. Whether, on the facts and in the circumstances of the case, the finding of the Tribunal that the Income-tax Officer was justified in drawing the conclusion that the assessee brought cash into the books of account for the purchase of shares but the source thereof was unexplained is vitiated being perverse and/or having been arrived at on a consideration of irrelevant materials and/or by ignoring relevant materials ?
3. Whether the order of the Tribunal upholding the addition of Rs. 11,20,000 as the assessee’s income from undisclosed sources is vitiated on account of non-consideration of the various contentions advanced on behalf of the assessee and is perverse ?
4. Whether, on the facts and in the circumstances of the case, the sum of Rs. 11,20,000 could be treated as the assessee’s income from the undisclosed sources ?”
2. Shortly stated, the facts are that the assessee is a partnership firm. The firm was constituted under an instrument of partnership deed executed on April 20, 1975, with eleven partners. The accounts of the assessee showed that it borrowed Rs. 11,20,000 from Messrs. Gazanund Bissesswarlall and Co., a proprietary concern of Shri J. M. Jatia, one of the partners. The money was invested in purchase of shares.
3. The Income-tax Officer examined the cash book and ledger of Messrs. Gazanund Bissesswarlall on April 23, 1975.
4. By examination of these books of account, the Income-tax Officer came to the conclusion that Guzanund Bissesswarlall had no cash balance to advance Rs. 11,20,000 to the assessee. The observations of the Income-tax Officer are contained in paragraphs 11, 12, 13 and 14 of his order. The Income-tax Officer came to the conclusion that the source of funds for the purchase of shares by the assessee was not explained, and, accordingly, assessed the sum of Rs. 11,20,000 as income from undisclosed sources.
5. The Commissioner of Income-tax (Appeals) before whom it was urged that actually no cash had passed but the entries were mere adjustment entries, rejected the arguments of the assessee’s counsel and confirmed the order of the Income-tax. Officer. His observations in paragraph 7 of his order are given below :
“I am unable to accept the contentions of the learned representative because his submissions run counter to the original entries made in the cash book as well as the copies of accounts rendered by the relevant companies. On the other hand, the cash transactions are borne out in all hands. The basic entries provide the fundamental picture of all transactions. The book of primary entry reflects the credit side of affairs as it is maintained in the regular course of business at the time of real conduct of actual transaction. This can hardly be disapproved by some interpretation moved by extraneous considerations. So the original entries can hardly be dislodged from their original context by such interpretation, however ingenious and skilful it may be. In the above circumstances of the facts as recorded in the books of account, the Income-tax Officer/ Inspecting Assistant Commissioner’s findings are, therefore, sustained.”
6. The matter came up in appeal before the Tribunal and it was also argued that the companies had to reduce their indebtedness in view of rule 58A of the Companies Act. The Tribunal held as follows :
“We have considered the rival submissions. The case sought to be made out in favour of the assessee is rather strange. The assessee maintains regular books of account and makes certain entries. The assessee is now trying to convince us that the entries made in the books were false and no value should be attached to them. It is impossible for us to hold that we have to disregard the entries in the books of account merely because it suits the assessee. If the idea was to reduce the indebtedness of the companies we do not understand how it has been brought out when corresponding assets have also been jettisoned by those companies making the overall ratio of indebtedness the same as before. We do not also see how rule 58A of the Indian Companies Act comes into the picture. Also, if those entries were merely adjustment entries we do not understand why journal entries were not passed making havalas which should have brought the same result. The very fact that cash entries are made for the purchase of shares by the assessee would show that the assessee had paid cash for the purchase of shares. Obviously, the assessee is not able to show how the cash was provided. The concerns from whom cash allegedly passed did not have enough cash balance to lend money to the assessee. In these circumstances, the Income-tax Officer was fully justified in drawing the conclusion that the assessee brought cash into the books of account for the purchase of shares but the source thereof was unexplained. The learned Commissioner of Income-tax (Appeals) was fully justified in endorsing the findings of the Income-tax Officer. We, therefore, do not see any reason to interfere with the orders of the authorities below. The appeal accordingly fails and is dismissed.”
7. A miscellaneous application was filed urging that some arguments advanced by the assessee were not considered by the Tribunal. The Tribunal gave its findings as follows :
“The assessee’s representative, as is clear from our log books, clearly referred to rule 58A at the time of hearing. As there was no such rule in the Companies Act, the argument had to be ignored. Further, the document at page 7 of the paper book being the direction of the Reserve Bank to non-financial companies, was not considered as it was not produced before the authorities below. It was also not the case of the assessee before the authorities below that the entries were made in pursuance of the Reserve Bank’s direction. The letters addressed by the three limited companies attempting to explain that the entries in their books were adjustment entries were not believed by the Inspecting Assistant Commissioner,
as they were contrary to facts. The Commissioner of Income-tax (Appeals) also told that, having regard to the clear narration in the stock account of the various concerns, the assessee’s story that no cash passed but only contra entries were made had to be rejected. The Tribunal agreed with this finding. In fact, the notice with which the limited companies attempted to reduce their borrowings does not explain the cash entries. What the assessee was required is to prove the source for the purchase of shares. In this attempt, the assessee has failed. We, therefore, do not find any mistake in our order.”
8. At the hearing, Mr. Bajoria, learned counsel appearing for the assessee, summed up the facts at the outset.
9. The partners of the assessee-firm are members of the Jatia family running several businesses and industries through numerous firms, concerns and companies commonly known as the Jatia Group. The three companies of the group, viz., Jatia Industries Pvt. Ltd., Praise Co. Pvt Ltd., and Onkar Industries Pvt. Ltd., borrowed large sums from Messrs. Gazanand Bissweswarlal and Co. (for short GB and Co.), a sole concern of Shri J. M. Jatia–one of the partners of the assessee. The ratio of the said borrowing to the paid-up share capital and reserves exceeded the permissible limit under the circular issued by the Reserve Bank of India in exercise of its powers under the Reserve Bank of India Act, 1934. According to the directions of the Reserve Bank of India, the said three companies of the group being non-financial companies were required to keep down the ratio of the loan to share capital and free reserves to the ceiling limit of 25% (later reduced to 15%). Learned counsel submitted that for the requirement of conforming to this prescribed ceiling limit of the volume of loans, the said three companies were to liquidate the loans borrowed from the said proprietary concern of Shri J. M. Jatia. But the said companies had not the requisite liquidity to discharge the loans. Since the lending proprietary concern of Shri J. M. Jatia belonged to the same group, an arrangement was made for reduction of the volume of borrowing of the companies to the requisite limit. Therefore, a partnership firm, i.e., the assessee, was constituted on April 20, 1975, with the members of the Jatia family as its partners. Within three days from the date of constitution of the firm, the said three companies showed sale of shares which it had been holding in various companies of the Jatia group to the firm. In exchange, as consideration, the firm made a credit entry in the cash book of an aggregate sum of Rs. 11.20 lakhs in favour of the said three companies. The said three companies, in turn, showed the credit entries in the cash books as repayment of loan aggregating in all to Rs. 11.20 lakhs. The assessee-firm showed the amount of consideration payable to the three companies as paid out of the loan from the said sole concern of Shri ). M. Jatia, viz., GB and Co., by making a debit entry in the cash book without, however, receiving any cash. Necessary entries relating to the transactions were passed in the books of account of the assessee, GB and Co., and the three companies through their respective cash books. Thus, the cash book showed that there was merely a circulation of cash ending at the point it began, the cumulative effect being that the assessee became a debtor to GB and Co. in place of the said three companies of the group.
10. This is the crux of the whole matter. The Income-tax Officer’s case is that the transactions were recorded in the cash book through a circuit, but at no point in the circuit there was cash. In the words of the Income-tax Officer, the position found by him that warranted the addition of this amount of Rs. 11.20 lakhs in the hands of the assessee is as under :
“In view of the transactions recorded above, it is apparent that the money flowing amongst the parties including the assessee-firm cannot be explained as belonging to Messrs. GB and Co. The same cannot be said to have belonged to Messrs. Jatia Industries Pvt. Ltd., Messrs. Onkar Industries Pvt. Ltd., and Messrs. Praise Co. P. Ltd., as they did not have their own cash balance for advancing money to Messrs. GB and Co.”
11. What the Officer drives at is that each of the parties made entries in the cash book in spite of their not having any cash to pass on.
12. Therefore, the advance of loan in cash by GB and Co. to the assessee-firm, as reflected in the entry in the cash book of the assessee-firm, is unexplained cash credit, which attracts the provisions of Section 68 of the Income-tax Act, 1961.
13. According to Shri Bajoria, the whole matter boils down to the fact that though the entries were made in the cash book in the case, there was no passage of cash at any stage. The whole thing was arranged by the entries to show that GB and Co. notionally advanced cash to the assessee-firm though not having cash to pass on. The assessee-firm, in turn, paid as consideration for the shares to the said three companies the same nonexistent cash as the aggregate purchase value of the shares held by the said companies in the other companies of the group without, however, any passage of cash and the said companies in their turn passing on the said non-existent cash to GB and Co.
14. Shri Bajoria emphasised that, in the course of assessment proceedings, the Income-tax Officer examined the transactions and found that these are only entries not involving at any stage any cash. He pointed out that the entire transactions were effected between the assessee-firm and the concerns belonging to the Jatia group only for the requirement of complying with the directions of the Reserve Bank of India that cast on the companies a statutory obligation to reduce their borrowing to maintain parity with the loan and capital ratio as prescribed. The assessee-company merely substituted the said three companies as debtors to GB and Co. and received the shares for undertaking the liability.
15. Confronted with the question why the reduction of loan could not be achieved by straightaway transfer of the shares in question by the said three companies to GB and Co. in discharge of the loans, without creating a circuit, Shri Bajoria explained that such a course was not acceptable to all the members of the family as the lender, GB and Co., is the sole concern of Shri J.M. Jatia. To avoid the jeopardy of the other members of the Jatia family this arrangement had to be made, and the assessee-firm had to be created as a device to protect the interest of all members of the group. In any case, it. was urged that the transactions as also the creation of the assessee-firm were devices to avoid the mischief of the ceiling imposed by the Reserve Bank of India on the aforesaid three non-financial companies. The assessee-firm stepped into the shoes of the said three companies. The companies ceased to be debtors and, to that extent, the magnitude of its loan fell within the prescribed ratio.
16. It is finally emphasised by learned counsel for the assessee that the ultimate result is that the firm becomes a debtor to GB and Co. and the three non-financial companies of the group got discharged. Learned counsel also emphasised that, at the worst, it can be said that the assessee-firm has received valuable assets being the said shares of the equivalent value of the debt taken over by it from the companies, i.e., Rs. 11.20 lakhs.
17. Therefore, the question of cash credit does not come in, there being no actual passing or receipt of cash. In other words, the transactions are mere book entries. It was contended that the fact that the entries passed through the cash book could not detract from or efface the essential nature of the entries. It was also urged that the entries were passed through the cash book so that the repayment of loans by the said three companies could be established before the Reserve Bank of India. But, according to Shri Bajoria, that does not mean that it amounts to an artifice employed to deceive any authorities, because the transactions showing the amount as received in cash and paid away spontaneously and simultaneously were not actual but only notional. He, however, stated that, as far as the question of Section 68 is concerned, the nature of the transactions and the entries clearly show that no cash, in fact, flowed. It was further stressed that the transactions are above board. No outsider is involved. The entries were made in the books of the concerns of the same group. The shares in question were also of the companies of the group. There was no attempt at hiding the transactions. Nor is it the case of any of the parties to the transaction that there was any passing of cash. Every party unequivocally stated that the transactions were carried into effect merely by way of adjustments of the said loans and the share transfers.
18. Shri A.C. Moitra, the learned advocate for the Revenue, reiterated the grounds on which the Tribunal has affirmed the addition of the amount of Rs. 11.20 lakhs as unexplained cash credit. He particularly emphasised that the assessee’s contention that the entries are only adjustment entries is not acceptable, because the adjustment entries are not made through the cash book. It is an accepted principle of accounting that book adjustments and the entries in effecting them are made by journal entries and not cash entries. He urged that the purported motive of the entries being the reduction of loans of the three limited companies does not explain the whole matter, because the entries are cash entries. The fact remains that, at every stage, the parties showed the payments and receipts of cash even when there was no cash available for such entries. This quite justifies the addition as sustained by the Tribunal.
19. We have perused the assessment order carefully. We find that cash did not pass at any stage though entries were made in the cash book showing payments and receipts ; but since the entries made a complete round, no passing of cash was necessary for the purpose of making the entries. That there was no passing of cash is also admitted by the Income-tax Officer himself. We have already extracted the observation of the Income-tax Officer in paragraph 14 of his assessment order. The Income-tax Officer has clearly opined that all the respective parties did not receive cash nor did pay cash as none had any cash for the purpose. The only point in the assessment order is that the entries not involving the passing of cash should not have found a place in the cash book, but in the ledger account through journal entries. There is another self-contradiction in the Income-tax Officer’s finding that, if there was no real cash entry on the credit side of the cash book, but merely a notional or fictitious cash entry, as admitted by him, there is no real credit of cash to its cash book ; the question of inclusion of the amount of the entry as unexplained cash credit cannot arise.
20. One of the grounds of the Tribunal for disbelieving the assessee’s case is that the adjustment entries were made by notional cash entries with a view to bringing down the debt-and-capital ratio, i.e., that while being discharged of the debt the said companies also jettisoned their assets, i.e., the shares held by them of equivalent sum without achieving the avowed purpose. Here the Tribunal certainly misdirected itself. The ratio to be reduced is of the loan in relation to the share capital and the reserves. Jettisoning the shares had the desired effect of reducing the borrowed capital.
21. Again, as regards the Tribunal’s refusal to take notice of the directions of the Reserve Bank, it is not correct for the Tribunal to hold that the said document was a new evidence in the true sense of the term. The assessee has been consistently pleading before the lower authorities that the entries had to be made in order to bring the companies in conformity with the said direction. Moreover, the direction of the Reserve Bank is a public document within the meaning of Section 74 of the Evidence Act, 1872. Documents of a public nature and public authority are generally admissible in evidence subject to the mode of proving them as laid down in sections 76 and 78 of the Evidence Act.
22. In our view, the effect and import of the transactions is that the assessee took over the liability of the aforesaid non-financial companies to GB and Co. in exchange for the shares as aforesaid.
23. In the premises, we answer all the questions, in the affirmative and in favour of the assessee and against the Revenue.
24. There will be no order as to costs.
K.M. Yusuf, J.
25. I agree.