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Judgment
Ramanujam, J.—The assessee in this case is a firm running a hotel in Coimbatore. For the assessment year 1965-66 the assessee had
disclosed a gross profit of 5.5%. The assessee had also shown certain credits in the shape of loans from various hundi bankers. The ITO felt that
the gross profit shown was considerably low and estimating the gross profit at 23% he made an addition of Rs. 69,311 as concealed profits. As
regards cash credits, the explanation of the assessee was that the loans as entered in the books of accounts were genuine and the ITO after
rejecting that explanation made an addition of Rs. 85,000 on that account. Similarly for the year 1966-67 on the same lines a gross profit addition
of Rs. 58,127 had been made and the cash credit addition made was a sum of Rs. 57,042. Aggrieved by the said additions, the assessee appealed
to the AAC, who sustained the addition made both in gross profit as well as towards cash credit. But he accepted the assessee''s statement that
the gross profit addition should be telescoped with the addition made for cash credit. In that view he sustained the addition of Rs. 85,000 for the
year 1965-66 and Rs. 60,000 for the year 1966-67.
The Revenue took the matter in appeal before the Tribunal contending that the AAC was in error in telescoping the gross profit addition with the
addition made on cash credit and that such telescoping cannot be sustained in view of the decision of the Supreme Court in KALE KHAN
MOHAMMAD HANIF Vs. COMMISSIONER OF Income Tax, MADHYA PRADESH AND BHOPAL., . The Tribunal, however, did not
accept the case of the Revenue and proceeded to hold that the profits concealed by showing a lesser gross profit rate should be taken to be the
amount brought in by way of bogus cash credits and that, therefore, it is not possible to have two separate additions. In this view, the Tribunal
accepted the assessee''s claim that the additions on account of cash credit should be merged with the gross profit additions in the trading account
and upheld the order of the AAC. Aggrieved by the decision of the Tribunal, the Revenue sought and obtained a reference to this court on the
following question of law :
Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the two separate additions
made, (1) for deficiency of gross profit, and (ii) for unproved cash credits, should be telescoped and covered into one addition ?
Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right and had materials to hold that the cash credits in the
books of the assessee were nothing but undisclosed profits in its business ?
The learned counsel for the Revenue contends that in this case the two additions came to be made under two separate heads; one addition was
made for suppression of gross profit by showing a lesser gross profit rate and the second addition came to be made towards cash credit in favour
of third parties, which the assessee was not able to explain. These two additions have to be treated separately and one cannot be telescoped into
the order as has been done by the AAC as well as by the Tribunal. According to the learned counsel for the Revenue, the Tribunal is in error in
stating that to sustain a separate addition towards bogus cash credit, the Revenue has to establish that the assessee had any other separate source
of income and the assessee in this case has not been shown to have any other business, other than that of hotel business and, therefore, the learned
counsel refers to the decisions in Commissioner of Income Tax, West Bengal Vs. Durga Prasad More, and Commissioner of Income Tax, Madras
Vs. M. Ganapathi Mudaliar, . In Commissioner of Income Tax, Madras Vs. M. Ganapathi Mudaliar, , it was pointed out by the Supreme Court
that (headnote) :
Once it is held that an amount credited in the account books of the assessee is the income of the assessee, it is not necessary for the department to
locate its exact source.
But we do not see how the said decision is on any help to the Revenue. That was a case where certain amount was found credited in the
account books of the assessee as income. The court held that once it is held that an amount credited in the account books of the assessee is the
income of the assessee, it is not necessary for the Department to locate its exact source. Though the assessee has shown certain cash credits, he
has not explained the genuineness of the same. It is, therefore, possible to treat this as bogeys credit entries. But when the assessee has come
forward with a plea, after his explanation as to the genuineness of the cash credit entries was rejected, that cash credits represented his concealed
profits from the hotel business, the Department is bound to investigate the same.
Commissioner of Income Tax, West Bengal Vs. Durga Prasad More, , was a case where the Supreme Court, relying on Commissioner of
Income Tax, Madras Vs. M. Ganapathi Mudaliar, , expressed the view that (headnote) :
Once it is found that a receipt by the assessee was income of the assessee, it is not necessary for the Revenue to locate its exact source, applies
alike to case in which an entry is found in the books of account of the assessee as to cases in which no such entry is found.
We are, therefore, of the opinion that this decision also does not apply to the facts of this case. This decision will apply only if there has been an
addition towards the bogus cash credit alone. But in this case in addition to the bogus cash credit there is an addition towards suppression of profit.
In such a case as this, when there are two additions, it is always open to the assessee to explain that the suppressed profits during the year has
been brought in as cash credits and, therefore, one has to be telescoped into the other and there can be only one addition. The position that the
assessee is entitled to claim that both the additions should be telescoped into one in such a situation is clear from the decision of the Supreme Court
in Commissioner of Income Tax, Uttar Pradesh Vs. Devi Prasad Vishwanath Prasad, . The facts in that case are more or less similar to the facts in
this case. In the case before the Supreme Court there were two additions, namely, one towards suppressed business profits and the other towards
the bogus cash credits. The Supreme Court first held that (p. 196) :
There is nothing in law which prevents the Income Tax Officer in an appropriate case in taxing both the cash credit, the source and nature of
which is not satisfactorily explained, and the business income estimated by him u/s 13 of the Indian Income Tax Act, 1922, after rejecting the
books of account of the assessee as unreliable.
The Supreme Court, however, proceeded to say that (p. 197) :
Where there is an unexplained cash credit, it is open to the Income Tax Officer to hold that it is income of the assessee, and no further burden lies
or the Income Tax Officer to show that income is from any particular source. It is for the assessee to prove that even if the cash credit represents
income, it is income from a source which has already been taxed.
As per the decision of the Supreme Court, it is open to the assessee to prove that the cash credits came from the suppressed profits towards
which an addition has already been made, and, therefore, there should be telescoping of one with the other.
The decision of the Supreme Court in Commissioner of Income Tax, Madras Vs. S. Nelliappan, , also in a way, supports the case of the
assessee. In that case also there were two additions, one towards bogus cash credit and the other towards profits suppressed. It was found by the
Tribunal that there is a connection between the profits withheld by the assessee in the account books and the cash credit entries found therein and,
therefore, it can be concluded that only one addition could be made. When the matter came to this court, this court rejected the reference and then
the matter was taken to the Supreme Court. The Supreme Court dismissed the appeal holding that (p. 725) :
It is true that there is no direct evidence of any connection between the cash credit entries and the income withheld from the books of account by
the assessees.
But if the Tribunal inferred that there was a connection between the profits withheld from the books and the cash credit entries, it cannot be said
that the conclusion is based upon speculation.
It is thus clear that the view taken by the Tribunal in this case that the additions towards the suppressed book profits should telescoped with the
additions towards the cash credit is legally tenable. The questions are, therefore, answered in the affirmative and against the Revenue. The assessee
will have its costs from the Revenue. Counsel''s fee Rs. 500.