NAIMUDDIN, J: --This appeal by leave is from the order of the Lahore High Court, Lahore dated 30th May, 1975 passed in TR No. 70 of 1973. The relevant facts are that the respondent/assessee is a private limited company engaged in the business of ginning and pressing cotton and extracting oil from oil-seeds.
2. For the assessm ent year 1967-68 relevant to the accounting year 1st September, 1965 to 31st August, 1966, the assesses filed' its return of income-tax. But the declared version for its pressing, ginning and oil business was not accepted by the Income-tax Officer, who made suitable addbacks not disputed before the High Court in the reference.
3. In addition to the above, during the said year the assessee also purchased grams and after conversion into Dal, used to sell it. In connection with that business the assessee had obtained an overdraft facility from the National Bank of Pakistan. According to the assessee the company had a closing stock of 21,656 maunds and 26 seers of gram with its declared value at Rs. 3,88,717. But the Income-tax Officer, on enquiry from the Bank, was able to ascertain that according to their record the total stock of the gram pledged with the Bank weighed 87,140 maunds of the value of Rs.
13,07,180 against the declared value of Rs. 3.88,717. The assessee was given an opportunity by the Income-tax Officer to explain the discrepancy. The assessee in their reply explained that the position of stock was overstated to the Bank in order to secure greater credit facility and accommodation from them. But the Income-tax Officer found it impossible to believe that the stocks could have been overstated to the extent of almost 400 per cent as alleged. He therefore rejected the explanation of the assessee and made addition of Rs. 9,18,363 to the income of the assessee on account of the under --valuation of the stock of Dal/grams and treated it as income from undisclosed source.
4. Aggrieved by the order the assessee went up in appeal before the Income-tax Appellate Tribunal (Pakistan) Lahore. But the Tribunal by the order dated 25th January, 1977 rejected the appeal, maintaining the additions made by the Income-tax Officer. This resulted in the filing of the reference in the High Court out of which the present appeal has arisen. In the reference following questions were referred to the High Court.
"(a) Whether in the facts and circumstances of the case there is any legal and relevant evidence on the record in respect of the finding that the applicant had 64,491 maunds, 14 seers grams in excess of the closing stock of 21,651 maunds 26 seers shown by the applicant in its account?
(b) Whether having regard to the fact that the applicant-assessee, during the whole of the account year in question, purchased only 34,761 maunds of grams, there was any valid reason or ground for the Tribunal to hold that the applicant assessee had a closing stock of 87,145 maunds of grams at the end of the accounting year?
(e) Whether in the facts and circumstances of the case the Tribunal and the Income-tax Officer could lawfully add the value of 64,491 maunds, 14 seers of grams to the closing stock without at the same time allowing seduction of the corresponding purchase price of the alleged excess quantity?
(d) Whether on the facts and in the circumstances of the case the addition of Rs. 9,18,368 representing the value of the alleged suppressed closing stock of gram is not arbitrary and perverse?"
5. The High Court considering the questions observed that the findings are based on ample material received from the Bank and the explanation submitted by the assessee was not considered to be satisfactory. Accordingly, the High Court held that: "In these circumstances we have no hesitation in holding that the Tribunal was justified in relying on the material supplied by the Bank and that finding by the Tribunal that the assessee had 64,491 maunds, 14 seers of grams in excess of the declared closing stock of 21,653 maunds 26 seers, is based on cogent and relevant evidence adduced on the record. The Tribunal in agreement with the Income-tax Officer was justified in rejecting the accounts produced by the assessee."
Accordingly on the facts and in the circumstances of the case the High Court answered the first two questions in the affirmative and proceeded further to observe as follows: "At the same time we find considerable force in the contention advanced by the assessee to the effect that both the Income-tax Officer and the Tribunal acted illegally in making the addition of Rs.
9,18,363 as the assessable income of the assessee from this business. This amount merely represented the gross value of suppressed closing stocks of grams without at the same time allowing any deduction for corresponding purchase price of the excess commodity."
And therefore held that the addition of Rs. 9,18,363 without deducting the purchase price cannot be sustained and accordingly in the circumstances and to the extent mentioned above answered the third question in the negative.
7. In answer to the fourth and last question the High Court held that the addition, therefore, was made arbitrarily and perverse.
8. Leave was granted by a short order dated 17th March, 1977, which reads as follows: "The High Court has overlooked that the amount spent in the purchase of grams found in excess of the declared stock is to be treated under section 4(2-B) of the Income-tax Act as investment during the financial year 1966-67. In other words the amount invested in the purchase represents concealed income of the previous years. The question of deduction of purchase price from the market price would not, therefore, arise."
9. We have heard Mr. A.H. Najfi for the appellant and Mr. M. Munir Piracha for the respondent.
10. We find that in answering the third question the High Court seriously erred in holding that addition of Rs. 9,18,363 without deducting the purchase price of grams, cannot be sustained and the order was arbitrary and perverse. It is pertinent to mention, as stated before, that when the assessee was confronted with the information received from the National Bank of Pakistan, Sargodha, that stock of grams pledged by the assessee with them was 87,140 maunds, instead of 21.00 maunds and 26) seers, as disclosed by it the assessee's explanation was that t h: stock was overstated for accommodation. The High Court itself answered the first two questions confirming the finding of the Income-tax Officer and the Tribunal, in the affirmative, in these words: "The findings are based on ample material received from the Bank and the explanation submitted by the assessee was not considered to be satisfactory. In these circumstances we have no hesitation in holding that the Tribunal was justified in relying on the material supplied by the Bank- --------.---
11. Now, the value of the excess stock was shown to be Rs.9,18,363 at the rate of Rs.15 per maund. The investment in the excess stock was therefore treated as income of the assessee from previous year and taxed by the Income-- tax Officer. We fail to understand how did the question of deducting the corresponding purchase price of the excess stock of grams are when the entire value of excess stock was deemed to be the income of the assessee from the previous year. No reference was made by the High Court to any law for the proposition that in such circumstances the purchase price of the undeclared stock had to be deducted. A reference to the relevant law will show that this entire amount is deemed to be the income of the assessee from the previous year. Not only the excess stock but the entire stock was valued at Rs. 15 per maund, which appeared to be the cost value or purchase price of the assessee. Therefore, the value of the excess stock represented the purchase price thereof. Here a reference to Section 4(2-B) of the Income-tax Act, 1922, which is relevant for the purpose of this case, will be pertinent. It may be quoted here for the convenience of ready reference. It reads as follows: "Where, in the previous year immediately preceding the assessment year, the assessee had made investments which are not recorded in the books of account, if any, maintained by him for any source of income, nor shown in any statement furnished by him under subsection (4-A) of section 22 and the assessee offers no explanation about the nature and source of the investments or the explanation offered by him is not, in the opinion of the Income-tax Officer, satisfactory, the value of the investments may be deemed to be income of the assessee of such previous year.
12. A perusal of the above provision shows that the value of excess stock which was the value of the investment was deemed to be the income of the assessee from previous year. Therefore, the order of the Income-tax Officer or the Tribunal could not be termed as arbitrary or perverse.
13. Whether a receipt or investment is to be treated as income or not, depends very largely on the facts and circumstances of each case. Where an assessee fails to provide satisfactorily the source and nature of certain amounts of cash receipts or investments during the accounting year, the Income-tax Officer is entitled to draw the inference that the receipts or investments are of an assessable nature. Reliance is placed on A. Gobindarajulu Madaliar v. Commissioner of Income- tax, Hyderabad (1958) 34 ITR 807. Reference may also be made to Auto Store v. Commissioner of Income-tax, East Pakistan (PLD 1964 Dacca 433), where it was held that "the words income from undisclosed source' may mean income from undisclosed item of a known line of activities or it may mean income D from source which was unconnected with any of the known sources or lines of the profit running activities followed by the assessee altogether unknown. In the case of first category it would be a case of undisclosed profit of the known business and in the second category it will be an income from a business altogether different from the business under consideration, absolutely unconnected." In that case, it was further held, that the Income-tax Officer may presume an unexplained amount to be an income of the assessee. It may be mentioned that the learned Judges were dealing with an entry in the account books of the assessee showing a sum of Rs.
24,000 as amanat or deposit from his father. The Income-tax Officer did not accept the explanation and his action in treating this amount as income from an undisclosed source was upheld.
Reference may also be made to Commissioner of Income-tax v. Universal Engineering Co. (PLD 1903 Kar. 487) and to Messrs Ellahi & Co. v. Commissioner of Income-tax (PLD 196,3 Kar. 490).
14. It may be pertinent to quote three passages from the judgment of this Court in Samina Shaukat Ayub Khan v. Commissioner of Income-tax, Rawalpindi (PLD 1981 SC 85) on which reliance was placed by Mr. Najfi, learned counsel for the appellant, which appear on pages 91 and 92 of the report and read as under: "It will be seen that the term ---income---, as used in the Income-tax Act is, indeed, a term of wide significance, and generally and ordinarily At connotes a periodical monetary return, coming in with some sort of regularity, or expected regularity, from a definite source; but, as observed by the Privy Council, the multiplicity of forms which income may assume is beyond enumeration; and income need not necessarily be the recurrent return from a definite source, though it is generally of that character. It may consist of a series of separate receipts, as for instance happens in the case of professional earnings. In the last analysis, the question whether a particular kind of receipt is income or not would depend for its answer on the peculiar facts and circumstances of the case. If the nature of the receipt and its source and not satisfactorily explained by the assessee, facts which are generally within his peculiar knowledge, the Income-tax Officer may legitimately presume that the amount in question is an income of the assessee from an undisclosed source.
Once a finding is recorded that the amounts in question could be treated as income within the meaning of the charging section, section 3 of the Income-tax Act, the burden of proving that the income qualified for exemption under any of the clauses of section 4 of the Act was on the assessee. Subsection (1) of section 4 of the Act provides that "subject to the provisions of this Act, the total income of any previous year of any person includes all incomes, profits and gains from whatever source derived---------" Subsection (3) of the same section then enumerates exemptions, and the operative words arc "any income, profits or gains falling within the following classes shall not be included, in the total income of the person receiving them...." It was for the appellant to show that she was covered by the exemption granted by clause (vii) of subsection (3).
This she clearly failed to do, for the reason that she could not satisfactorily explain the source of the entire amount of cash found in her hands, nor of the total accretions thereto in subsequent years.
It does not need much reasoning to see that if the source of income is, not disclosed or satisfactorily explained, then it is not possible to hold that the income was not from business or from the exercise of a profession, vocation or occupation;---------"
These observations will also apply in the light of the provisions of Section 4(2-B) of the Act in respect of investments which are not recorded in the books of account or any statement furnished by him under Section 22(4-A), the nature or source of which could not be explained to the satisfaction of Income-tax Officer.
15. It was, however, argued by the learned counsel for the respondent that the respondent/assessee was not given any opportunity to explain the excess stock and the source from which the investment was made in it. The submission is misconceived for the assessee was asked to explain the discrepancy in the stock of 87,140 mounds of grams valued at Rs. 13,07,180, pledged with the Bank and the stock of 21,656 maunds and 20 seers of the value of Rs. 3,88,717 disclosed by the assessee. The assessee's stand was that there was no excess stock but only the figures were inflated to get accommodation or greater credit facilities from the Bank against the pledged stock. This plea was not accepted by the Income-tax Officer, the Tribunal and even by the High Court. From the pica it follows that the stand of the assessee was that there was, in fact, no excess stock, therefore, no investment in the excess stock and therefore there was no income from undisclosed source. This explanation, as stated earlier, was not accepted. Therefore, there was no need or requirement or demand to give further opportunity to the assessee to explain the source of money invested in the excess stock.
16. We, therefore, set aside the order of the High Court and answer the third and fourth questions in the affirmative, and thus allow the appeal leaving the parties to bear their own costs.