1982 (8) TMI 134 - AT - Income Tax

Summary

Issues:
Assessment of unexplained investment based on accrued interest income without sufficient evidence.

Analysis:
The judgment pertains to an appeal by the assessee for the assessment year 1966-67 where the assessee had not been assessed previously and did not file a return initially. The Income Tax Officer (ITO) issued a notice under section 148, following which the assessee filed a return showing income from house property and interest income. The assessee explained the source of her investment, including gifts received during her marriage, maintenance funds from her husband, and interest earned from lending money. The ITO accepted a disclosed sum and a gift but assessed the remaining interest income as unexplained investment due to lack of evidence on money lending activities.

The assessee appealed before the Appellate Assistant Commissioner (AAC), arguing that she could have invested the available funds and earned interest. However, the AAC rejected the claim due to the absence of evidence supporting the money lending and interest earning activities. Consequently, the assessment was confirmed, leading to a further appeal by the assessee.

Upon considering the facts and circumstances, the Appellate Tribunal observed that while direct evidence of money-lending was lacking, circumstantial evidence could establish the accrual of interest. The Tribunal noted that the assessee had a significant amount available over four years and could have easily earned interest on it. The Tribunal emphasized that it is reasonable to infer that the interest income accrued from the funds available, rather than from unexplained sources, especially when there is a possibility of legitimate activities. The Tribunal highlighted the importance of considering possibilities and preferring inferences aligned with legal and legitimate activities.

The Tribunal criticized the approach of the tax authorities, noting that insisting on direct evidence of money lending activities after a significant period is unreasonable. The Tribunal emphasized the need to assess the satisfactoriness of the explanation regarding the source of funds and to prefer inferences that align with legal activities when multiple possibilities exist. Ultimately, the Tribunal concluded that the source of the investment in the building was satisfactorily explained, leading to the deletion of the addition of unexplained investment. The judgment allowed the appeal, leaving the question of the validity of section 148 proceedings open for further consideration.