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Income Tax Appellate Tribunal - Amritsar

Davinder Singh vs Assistant Commissioner Of Income Tax on 24 March, 2006

Equivalent citations: [2007]104ITD325(ASR), [2007]290ITR306(ASR), (2006)101TTJ(ASR)505

ORDER

Joginder Pall, A.M.

1. By this order, we shall dispose of this appeal of the assessee filed against the order of the CIT(A), Bhatinda, for the asst. yr. 2001-02.

2. In this appeal, the assessee has taken following five effective grounds :

1. That the learned CIT(A) is not justified in making the addition of Rs. 60,87,326 as the amount payable to the various agriculturists by resorting to the provisions of Section 28 of the IT Act, 1961.

2. The learned CIT(A) is also not justified in making addition of Rs. 3,86,563 on account of alleged diversion of income under the head Dami by misconceiving the facts of the case.

3. That the learned CIT(A) has failed to appreciate the trade practice as well as the legal aspects put forward during the proceedings before him.

4. That CIT(A) has also not considered detailed submissions and arguments which were advanced before him and summarily rejected the submissions without going into the facts that the purchases from agriculturist is strictly controlled and regulated by the market committee officials.

5. That CIT(A) has also erred in holding that Inspector was legally authorized to record statement and reliance of the AO and CIT(A) in this regard is totally misleading.

3. As regards the first issue relating to sustaining of an addition of Rs. 60,87,326, the facts of the case are that the assessee filed the return declaring therein income of Rs. 2,01,570. The assessee earned income from Dami being commission agent for sale of agricultural produce like cotton and Narma. The AO observed that the assessee had capital of Rs. 64,032 for the assessment year under consideration and meagre capital of Rs. 72,260 and Rs. 43,218 for the subsequent asst. yrs. 2002-03 and 2003-04, respectively. On scrutiny of the balance sheet, the AO found credits of Rs. 62,55,097 for the assessment year under reference. He also observed that as against these credits, the balance sheet indicated sundry debtors amounting to Rs. 22,95,676, Rs. 7,64,469, Rs. 7,35,000. Rs. 5,68,200 and Rs. 1,50,000 (aggregating to Rs. 45,13,145) in the names of M/s Maya Cotton & General Mills, Kotkapura, M/s Gee Ess Ahuja Cotton & General Mills, Ahuja Gift House, Sh. Gurcharan Singh (father of the assessee) and M/s Ahuja Cotton & General Mills, Kotkapura, respectively. All these concerns who owed money to the assessee belong to assessee's close relations, i.e., father, brother of the assessee, relatives of the assessee and a concern where assessee himself was a partner. The AO, therefore, scrutinized the sundry creditors appearing in the balance sheet and asked the assessee to furnish the names and addresses of these persons. These details were furnished and appeared on p. 8 of the assessment order, where credits amounting to Rs. 62,55,097 in the names of 52 persons have been listed. The assessee stated that all these persons had sold their agricultural produce to the assessee. The AO sent enquiry letters by registered post to 12 out of the 52 persons at the addresses given by the assessee. All these letters were returned by the postal authorities 'unserved' with the remarks "not known". Thereafter, the AO issued a show-cause notice vide letter dt. 8th March, 2004 mentioning this fact and his tentative conclusion that these credits did not appear to be genuine. The assessee was asked to produce these creditors simultaneously. The AO also issued summons to the parties on 9th March, 2004 and sent the same through four Inspectors, who were also asked to serve the same on the parties and to make enquiries in the villages to find out whether these parties existed at the given addresses and also whether they had sold the agricultural produce through the assessee. Such enquiries revealed the following position :

(a) Shri Hartej Singh, Panchayat Nagar Council, Kot Fatta, confirmed that no persons by the names (9 in number) were living in that village.

(b) Smt. Ranjit Kaur, Sarpanch Gram Panchayat, Kot Bakhtu, Block Talwandi Sabi, confirmed that no persons by the names (5 in number) were living in that village. However, Sh. Harminder Singh S/o Sh. Mukand Singh of this village was found living. His statement was recorded who denied having sold any agricultural produce through the assessee. He stated that he sold his crops through M/s Kundan Lal Sarvan Kumar 'Arhatias' of Raman Mandi for the last so many years.

(c) Smt. Krishna Devi, Sarpanch Gram Panchayat, village Khane Ki Dhaban, Block Malout stated that no person by the names (5 in number) were living in the village.

(d) The assessee had shown credit of Rs. 1,58,195 in the name of Sh. Tej Ram S/o Manjit Ram. of village Bariwala. An enquiry was made from that place which revealed that there was no person by the name of Shri Tej Ram. But there was a firm in the name of M/s Tej Ram Manjit Ram instead of an individual. The partner of the firm denied having any dealing with Sh. Davinder Singh Ahuja and having sold any Narma through the assessee.

3.1 Thereafter, the AO confronted the assessee with all the material gathered through the Inspectors, and furnished copies of the Inspectors' reports along with the statements of the aforesaid persons. He was asked to produce the creditors. However, the assessee could not produce the parties except one Shri Gurmail Singh and stated that in all these cases, it shall not be possible to produce or even identify the persons because most of the transactions were not frequent and regular and as on that date, the assessee did not owe any money to those parties. However, he contended that he was under no obligation to establish identity and genuineness of such persons because the assessee had to issue 'J' Forms to the sellers after obtaining their signatures as soon as the weighment was completed. On the basis of 'J' Forms, the assessee had to clear the liability. Thus, the AO observed that the assessee failed to discharge the onus cast on him to establish the identity of the persons and the source and genuineness of the credits. He relied on the judgment of Hon'ble Kerala High Court in the case of Oceanic Products Exporting Company v. CIT , where it was held that the onus was on the assessee to establish the identity of the persons, creditworthiness of the creditor and genuineness of the transactions. He further relied on two judgments of Hon'ble Supreme Court in the case of Kale Khan Mohammad Hanif v. CIT (1963) 50 ITR 1 (SC) and Roshan Di Hatti v. CIT , where it was held that the onus is on assessee to prove the source of receipt, whether it is of money or of other property. In case the assessee fails to satisfactorily explain, the Revenue is justified to treat the same as income and no further burden lies on the Revenue to establish that such income was from a particular source. He also relied on the judgment of Hon'ble Calcutta High Court in the case of Shankai Industries v. CIT in support of the contention that the burden was squarely on the assessee. The AO also observed that the assessee himself stated that he was not in a position to establish the identity-of persons. Relying on the judgment of Hon'ble Calcutta High Court in the case of CIT v. Precision Finance (P) Ltd. , the AO held that if the identity of the creditors had not been established, the question of establishment of the genuineness of the transactions or creditworthiness of creditors did not arise. The AO further observed that his contention that he did not know any of these persons was factually incorrect because some of these creditors also appeared in the subsequent assessment years, i.e., 2002-03 and 2003-04, respectively. The AO also observed that the assessee's sister-concerns, namely, M/s Maya Cotton & General Mills, M/s Gee Ess Ahuja Cotton & General Mills and M/s Ahuja Gift House were carrying on substantial business where huge funds were needed for their business. All these funds have been manipulated through the assessee otherwise, the assessee had meagre capital and could not have advanced such amounts to sister-concerns. The assessee also failed to produce any receipts or acknowledgements when amounts had been paid to these creditors in cash in subsequent assessment years by making cash entries in cash book. Thus, he observed that it was only a devise for manipulating funds for the sister-concerns as whenever they needed money, the same was provided in the guise of credits of agricultural produce. He also observed that in the subsequent assessment years i.e. 2002-03 and 2003-04, out of amounts shown as sundry creditors amounting to Rs. 35,72,114 and Rs. 1,03,00,198, the amounts due from sister-concerns in the form of sundry debtors aggregated to Rs. 32,26,965 and Rs. 1,02,17,053 respectively. Thus, the AO held that the assessee failed to discharge the onus cast on him under Section 68 of the IT Act, 1961 (in short 'the Act'). Since the assessee could produce only one person, viz., Sh. Gurmail Singh, who confirmed the sale and subsequent receipt, he accepted the credit in his name and accordingly made an addition of Rs. 60,87,326 of the remaining credits as unexplained credits.

4. Being aggrieved, the assesses impugned the addition in appeal before the CIT(A). It was argued before the CIT(A) that the provisions of Section 68 were not applicable because the assessee had not received cash. These credits represented sale of agricultural produce by the persons. It was also argued that the AO failed to successfully show that amount of credits represented assessee's income from undisclosed sources. The assessee also submitted that the AO had doubted only entries outstanding on the last date of the accounting year. It was also submitted that the AO had not rejected the books of account as he had not given any finding about the undisclosed sales/purchases, etc. and had not invoked the provisions of Section 145 of the Act. It was also argued that the assessee had maintained complete records required under the Punjab Agriculture Produce Markets Act, 1961 which were also subject to check by market committee and the other State Government authorities. These authorities had not found fault with the assessee about the maintenance of books of account or the procedures required to be followed. It was also argued that the statements of various persons were recorded at the back of the assessee and, therefore, could not have been utilized against him. It was also argued that the assessee was only a 'Kacha Arhatia' and as per Board's Circular No. 452, dt. 17th March, 1986 [(1986) 52 CTR (St) 1], the assessee was not required to get its accounts audited. However, these submissions did not find favour with the learned CIT(A), who upheld the addition on the ground that the provisions of Section 68 were applicable both in respect of money and the property, which also included receipts. For this proposition, he also relied on the judgment of Hon'ble Supreme Court in the case of Roshan Di Hatti v. CIT (supra). He also observed that the 'onus' was entirely on the assessee to establish identity of the creditors, creditworthiness and genuineness of the transactions and in the present case, this onus has not been discharged. Thus, he rejected the plea that the provisions of Section 68 were not applicable to the sale/purchase of agricultural produce. He also observed that it was not necessary for the AO to reject the books of account before applying the provisions of Section 68 of the Act. He observed that the provisions of Section 68 could be applied independently without rejecting the books of account. He also observed that it was not necessary that the entire entries appearing in the accounting year under reference should have been disallowed for the purpose of Section 68. Ultimately, the net addition called for was only in respect of amounts outstanding at the end of the year. He also observed that the requirement of market committee and other State Government authorities does not absolve the assessee from the provisions of Section 68 of the IT Act. He also rejected the submissions of the assessee that the assessee was not confronted with the material in the form of statements of persons recorded by the Inspectors. The learned CIT(A) observed that the assessee was given full opportunity by the AO and Inspectors' reports along with the statements recorded by them were given to the assessee during the course of assessment proceedings. Moreover, Inspectors were deputed along with summons for making enquiries as per the directions given by the AO. The assessee had himself admitted that it was not possible for him to produce any of the parties and to establish identity of the creditors. Therefore, the learned CIT(A) held that the AO had rightly relied and referred to those enquiries. He further observed that the assessee's reliance on CBDT Circular No. 452, dt. 17th March, 1986 (supra) in case of 'Kacha Arhatia' was relevant for the purpose of lessening the burden of Section 44AB on Kacha Arhatia. But these did not absolve the assessee for discharging a burden cast on him under Section 68 of the Act. Thus, the learned CIT(A) upheld the addition made by the AO. The assessee is aggrieved with the order of the CIT(A). Hence, this appeal before us.

5. The learned Counsel for the assessee, Sh. Sudhir Sehgal, reiterated the submissions which were made before the authorities below. He submitted that the assessee who was 46 years of age started business of Kacha Arhatia and was granted licence by Punjab Mandi Board, Chandigarh for the period from 8th Oct., 1999 to 31st March, 2002. He drew our attention to p. 80 of the paper book which is a copy of licence granted to the assessee. He was encouraged by his father and brother who were also engaged in the business of ginning of Narma and cotton and owned independent concerns. The name of the concern owned by his father Sh. Gurcharan Singh was M/s Gee Ess Ahuja Cotton & General Mills and the name of business owned by his younger brother was M/s Maya Cotton & General Mills. In order to protect the interest of the farmers, and cotton being an agricultural produce, the Punjab Agricultural Produce Markets Act, 1961, was brought into force so as to protect the growers of these crops from exploitation by the middlemen and profiteers. As per bye-laws the agricultural produce could be purchased only in market and middlemen and traders could not sell the produce directly to mill owners engaged in the business of ginning of cotton and Narma. The procedure for dealing with purchase and sale of agricultural produce has been detailed under Section 24 of the said Act. As per the procedure laid down under the Act, the assessee was required to maintain accounts and registers about the transactions of purchases and sales routed through the Kacha Arhatia. The transactions of purchase and sale are also subject-matter of levy of fee by the market committee. He also drew our attention to pp. 37 to 39 of the paper book which prescribes the manner in which the accounts have to be maintained. He also stated that any violation on the part of the assessee attracts stringent penalty under Sections 37 and 39 of the aforesaid Act. The various agriculturists located in Punjab and in the adjoining areas of Haryana and Rajasthan brought their agricultural produce to the assessee and the sales were made as per market committee bye-laws. The goods brought by the farmers are entered into 'Heap register' maintained by the assessee which was authenticated by the market committee. He drew our attention to pp. 30 to 35 of the paper book which is a copy of the Heap register which contained details of the name and address of the purchaser/seller, name of the produce, weight, units, date of auction, date of weighment, name of the purchaser, rate at which purchased and labour paid thereon. This register also contains signature of the persons who weighed the items. At the time of auction, the officials of the market committee always remained present and as soon as the sale is made, entries are made in 'Gadda Bahi' by debiting accounts of the purchasers and crediting the accounts of the agriculturists. Forms 'J' are prepared and issued to agriculturists which entitles them to take money from the commission agent on production of the same. He also drew our attention to pp. 36, 38 and 40 of the paper book which are copies of 'J' Forms containing details of seller and purchaser, rate at which sold, weight, total amount, labour charges and where the signatures of the seller and also of the Kacha Arhatia. He submitted that these forms were like bearer cheques which enabled the farmers to collect the amounts mentioned therein by presenting these forms to 'Kacha Arhatia'. He submitted that the names of these sellers also appear in the Heap register. Further Forms 'GH' are issued to the buyers of the agricultural produce. He also drew our attention to pp. 62 to 65 of the paper book which are copies of 'GH' Forms issued to the purchaser of the agricultural produce which contains the names of the buyers, rate at which purchased, total amount, labour charges etc. He further stated that weekly returns were also required to be submitted to the market committee and he drew our attention to pp. 44 and 45 of the paper book which are copies of such weekly returns. He further stated that unlike purchases of wheat and paddy made by Government agencies like FCI, PUNSUP, cotton and Narma produce were being sold to factory/mill owners in auction in the presence of officials of the market committee and the Government agency, i.e., the Cotton Corporation of India (CCI) buys crops only if the same falls below the minimum support price fixed by the Government. Therefore, 'Kacha Arhatias' are not very well known to the farmers like the wheat and paddy growers who sell their produce through 'Kacha Arhatia' to Government agencies. The only interest of the agriculturists is to sell their produce on better terms. The learned Counsel submitted that the assessee had maintained complete records prescribed by the market committee and no defects therein have ever been pointed out by such authorities. He further stated that all transactions of purchase and sale from farmers to the concerns have been accepted both by the AO and CIT(A) and they are subject to payment of market fees. The commission earned on such transactions has also been disclosed by the assessee and assessed to tax. Out of 52 parties in whose names amounts standing to their credit were noticed by the AO representing sale proceeds of their produce, one Shri Gurmail Singh S/o Sh. Kishan Singh appeared and his statement was recorded. He confirmed the sale made through the assessee for which payment was received on a later date. He submitted that the assessee had maintained regular books of account which have been accepted by the AO. Such books bear stamps of market committee. No defects have been pointed out in the books of account. He also submitted that sometimes 2 to 3 farmers joined together and brought their agricultural produce together and the assessee had no means of verifying their antecedents and identity. He argued that the AO had cast impossible burden on the assessee to produce the farmers and to file confirmations for the first time at the fag end of the limitation period when the case was getting barred by time. He submitted that the factum of agricultural produce sold by the farmers to the parties is duly supported by relevant records, evidence and material which were also furnished to the market committee and he further stated that income in the nature of 'Dami' earned by the assessee on these transactions has also been duly accounted for in the books of account. Accordingly, he submitted that no addition could have been made under Section 68 of the Act. He further argued that Section 68 is applicable only where the assessee has introduced any cash in his books. However, the assessee had not introduced any such cash and, therefore, no addition under Section 68 was liable to be made. He relied on the following decisions/judgments :

(i) Tribunal, Amritsar Bench in the case of Amritsar Trading Co. v. ITO ITA No. 586/Asr/1980 (copy placed at pp. 1 to 3 of the paper book) for the asst. yr. 1976-77, where it was held that in a case where purchases of the skins and hides were not doubted by the AO, no addition could be made for the reason that the assessee failed to produce the suppliers who had sold the goods to the assessee.

(ii) The Tribunal, Amritsar Bench, in the case of Asstt. CIT v. Swani Enterprises ITA No. 178/Asr/1996, asst. yr. 1992-93 (copy placed at pp. 4 to 16 of the paper book), where it was held that non-existence of the farmers from whom purchases had been made could not be the basis for addition because such purchases were represented by corresponding sales and the average purchase price from Arhatias' and from the parties was accepted by the AO. Moreover, the assessee had given proper explanation that due to influence of terrorist activities at the peak at the relevant time, the farmers might have left places at the time when AO made the inquiries.

(iii) The Tribunal, Amritsar Bench in the case of Dy. CIT v. Swani Enterprises ITA No. 398/Asr/1999, asst. yr. 1994-95 (copy placed at pp. 17 to 22 of the paper book), where purchases made from the suppliers were not fully verifiable, the Tribunal, held that since no defects have been pointed out, trading addition was not called for. The most significant aspect considered by the Tribunal was that there could have no exports without there being purchases. This case related to trading addition and not addition under Section 68 of the Act.

(iv) The Tribunal, Indore Bench in the case of Ali Hussain Abdeali Lokhandwala v. ITO (1991) 39 TTJ (Ind) 107 : (1991) 36 ITD 247 (Ind), where addition made under Section 68 on account of unexplained cash credits was deleted for the reason that the assessee had fully established the creditworthiness and genuineness of the transactions.

(v) Tribunal, Amritsar (Special Bench) in the case of Shanker Rice Co. v. ITO (2000) 67 TTJ (Asr)(SB) 84 : (2000) 72 ITD 139 (Asr)(SB). where it was held that in a case where accounts and registers maintained by the assessee were subject to check and scrutiny by the officials of the District Food and Suppliers Authorities and no defects in the maintenance of books of account have been pointed out, no addition on account of low yield of rice and other by-products could be made. It was stated before us that since books of account have not been rejected by the AO, no addition under Section 68 could have been made. But the issue before Amritsar Bench related to trading addition made on account of low yield and not under Section 68 of the Act.

(vi) Tribunal, Delhi Bench, in the case of Racmann Springs (P) Ltd. v. Dy. CIT (1995) 52 TTJ (Del) 660 : (1995) 55 ITD 159 (Del), where it was held that in a case where the AO accepted the figures of sundry debtors as on 30th June, 1981 to 30th June, 1985, he could not find fault with the figure of sundry debtors as on 30th June, 1980. Thus, it was held that realization from sundry debtors could not be made subject to addition under Section 68 of the Act for the asst. yr. 1981-82. These are not the facts of the present case.

(vii) Tribunal, Delhi Bench in the case of ITO v. Super Chemicals Distributors (2005) 1 SOT 102 (Del) (a copy placed at pp. 25 to 29 of the paper book) where amounts received from a party were settled through bills and cheques and assessee had business dealing with the same party in succeeding years also. On enquiry, the party was not found in existence. However, the AO made addition under Section 68 which was deleted by the Tribunal on the ground that without finding out further details of the party, credit could not be held to be bogus.

(viii) Tribunal, Delhi Bench in the case of Annamaria Travels & Tours (P) Ltd. v. Dy. CIT (2005) 95 TTJ (Del) 71 (a copy placed at pp. 30 to 35 of the paper book), where the tickets of the airlines sold in the last fortnight of March, 1997, paid to principal in April, 1997 and the assessee claimed deduction of the expenses for the asst. yr. 1998-99. Such expenses were held to be allowable in the year 1998-99 because such practice had been followed and accepted for about a decade. It was also observed that there was no loss to Revenue because rates of tax in case of a company were the same as for earlier year and subsequent assessment year. It was also held that no addition under Section 68 could be made in respect of the amount standing to the credit of sundry creditors for purchase of airlines tickets merely on the ground that no confirmation was filed from airline companies. But it was not a case where creditors were found non-existent. Therefore, it is not applicable to the facts of this case.

(ix) Tribunal, Delhi bench, in the case of ITO v. Naveen Gupta (2006) 5 SOT 94 (Del) (copy placed on pp. 36 to 40 of the paper book) where sale proceeds of sale of shares deposited in the bank account were treated as unexplained credits. The company was listed in Delhi Stock Exchange and the findings of AO that assessee had not explained the shareholdings of company 'A' was wrong. Further, the AO failed to record a finding that the assessee had introduced its own money in lieu of sale proceeds of shares, addition under Section 68 could not be made.

(x) He further submitted that the Inspector was not authorized to record statement of the parties and, therefore, statement could not have relied upon by the AO. He relied on the decision of Tribunal, Jaipur Bench in the case of Kamal & Co. v. Asstt. CIT (1998) 62 TTJ (Jp) 527.

(xi) Tribunal, Indore Bench in the case of ITO v. Jewells Emporium (1994) 48 ITD 164 (Ind) (copy placed at pp. 45 and 46 of the paper book) where it was held that Inspector could not record the statement of a partner on oath.

(xii) Tribunal, Amritsar Bench in the case of Dr. K.C. Khosla v. ITO (1985) 18 TLR 300 (copy placed at p. 47 of the paper book) where it was held that ITO and Inspector could not record the statement of persons under Section 131 outside the Court premises.

He further submitted that without rejecting the book results, the AO could not have made any addition under Section 68. He relied on the following judgments :

(xiii) C.M. Francis & Co. (P) Ltd. v. CIT where the issue before the Hon'ble High Court was whether the Tribunal was justified in applying the proviso to Section 13 of the old Act (Section 145 of the present Act) because the assessee did not obtain Bought Note from purchases made from the farmers.

(xiv) CIT v. Anupam Udyog , where it was held that the addition on account of unexplained cash credits under Section 68 was to be made in the year when such cash credits are introduced in the books of account.

The learned Counsel for the assessee further stated that the judgment of Hon'ble Supreme Court in the case of Roshan Di Hatti v. CIT (supra) relied upon by the authorities below is distinguishable on facts and hence not applicable. Relying on the judgment of Supreme Court in the case of CIT v. Smt. P.K. Noorjahan , the learned Counsel for the assessee submitted that the expression used in Section 69 is 'may' and not 'shall' which means that it is not obligatory on the part of the AO to make addition in each and every case where the explanation submitted by the assessee is not found to be satisfactory. He further relied on the judgment of Patna High Court in the case of Hanutram Chandanmul v. CIT which is on the procedure for reference to the Third Member and application of proviso to Section 13 of the old Act. He further relied on the decision of Supreme Court in the case of CIT v. Bharat Engineering & Construction Co. which was rendered in the context of old provisions of the Act which did not contain any section corresponding to Section 68 of the Act. However, the Hon'ble Supreme Court observed that the findings of the Tribunal that cash credit entered in the first year of business did not represent the income of the company and, therefore, was not liable to addition was a finding of fact which did not warrant any interference. He also relied on the judgment reported in 266 ITR 94 (sic). But there is no judgment reported in this ITR on this page. Thus, the learned Counsel summed up his submissions by stating that the assessee was a Kacha Arhatia, agricultural produce brought to his premises was sold in the presence of officials of the market committee and was purchased by the parties. All these transactions are duly supported by relevant records in the form of F 'J', Heap register, weekly statements submitted to market committee and market fees paid thereon. The assessee also earned 'Dami' on these transactions which was duly reflected in the books of account. The payments to the farmers were made in the subsequent assessment year and all these transactions were entered during the normal conduct of the business. Therefore, no addition under Section 68 was called for simply because the assessee failed to furnish confirmation from the parties concerned or to produce the parties. He further submitted that this issue was taken up at the fag end of the period when the assessment was getting time-barred and therefore, sufficient opportunity was not allowed. Besides, he contended that AO could have not relied on the statements of persons recorded by the Inspectors as they were not competent to do so.

6. The learned Departmental Representative, on the other hand, heavily relied on the orders of the authorities below. He submitted that the submission of the learned Counsel that provisions of Section 68 were not applicable to a case where credits in the books represented purchases made from the farmers and not cash credits was contrary to the provisions of the Act. He submitted that the expression used in Section 68 is where any sum is found credited in the books of account of the assessee. He submitted that 'any sum' does not include cash alone. He further referred to the judgment of Hon'ble Supreme Court in the case of Roshan Di Haiti v. CIT (supra), where it was held that the provisions of Section 68 are applicable to any receipt, whether it be of money or other property which the assessee failed to satisfactorily explain. He further relied on the judgment of Bombay High Court in the case of Dharmavat Provision Stores v. CIT (1981) 22 CTR (Bom) 277 : (1983) 139 ITR 700 (Bom) where amount credited to the capital account shown in the balance sheet was found in excess by Rs. 26,000 over the debit entries, the addition made on account of unexplained excess amount of Rs. 26,000 was upheld under Section 68 of the IT Act, 1961. Thus, he submitted that the provisions of Section 68 were rightly held applicable by the authorities below. He further submitted that the decision of Tribunal, Amritsar Bench in the case of Amritsar Trading Co. v. ITO (supra), relied upon by the learned Counsel was not applicable because in this case none of the persons in whose name credits appeared has been identified. The same is the position with various other decisions relied upon by the learned Counsel which are not applicable to the facts of the present case. In most of the cases relied upon by the learned Counsel additions were made by treating the amounts as bogus purchases without questioning corresponding sale. Therefore, the additions were deleted. But these are not the facts of the present case. He further relied on the judgment of Hon'ble Supreme Court in the case of Kale Khan Mohammad Hanif (supra) where it was held that burden of proving the source and genuineness of the liability is on the assessee. He further relied on the judgment of Hon'ble Calcutta High Court in the case of Shanker Industries v. CIT (supra), where it was held that in case of cash credits, the burden was on the assessee to establish the identity of the creditor, capacity of creditor and genuineness of transaction. Mere proof of identity of creditor was not sufficient. He further relied on the judgment of Punjab & Haryana High Court in the case of Smt. Shanta Devi v. CIT (1988) 68 CTR (P&H) 52 : (1988) 171 ITR 532 (P&H) where the amount introduced in the books of account of the firm by the partners of the firm were held to be (not) assessable in the (partners) hands where these were introduced in the books. He further relied on the decision of Hon'ble Calcutta High Court in the case of CIT v. Precision Finance (P) Ltd. (supra), where it was held that the assessee must prove the identity of the creditors and their creditworthiness. The Hon'ble Calcutta High Court also held that the fact that the transactions were through bank, was not conclusive. Since the assessee failed to produce any material to establish identity of the creditors and their creditworthiness, the addition made was held to be justified even though the amounts were received by cheques. He further stated that in this case, credits aggregating to Rs. 62,55,097 appeared in the names of 52 parties mentioned on p. 8 of the assessment order. He submitted that out of these parties, the assessee could produce only one party, namely Sh. Gurmail Singh S/o Sh. Kishan Singh mentioned at Sl. No. 29 of the list, who confirmed having sold the goods and received the amounts shown in his name. He submitted that in regard to 51 persons, the assessee failed to establish the identity of such persons despite full opportunity allowed to him. In fact, the AO co-operated with the assessee to such extent that he on his own issued summons under Section 131 to these parties and sent the same through his inspectors. But these could not be served on the persons as the parties were not found existing in the villages at the addresses given by the assessee himself. The enquiries made with village Sarpanches also confirmed that the persons were not in existence in the respective villages. He submitted that even though the AO confronted the results of enquiry along with copies of statements recorded by the Inspectors, yet the assessee conceded before the AO as mentioned on p. 11 of the assessment order that he would not be able to produce or even identify these persons because most of the transactions were not frequent or regular. He further stated that the learned Counsel has extensively argued about the identity of the persons having been established through Form 'J'. He drew our attention to pp. 36, 38 and 40 of the paper book which are copies of Form 'J'. He submitted that as per 'J' Form, the requirement was to record the name of the seller of produce along with his complete address. He submitted that in Form 'J', only the name of village Kot Fattu has been mentioned. This cannot be considered the complete address of the farmers. He further drew our attention to the relevant pages of the Heap register maintained by the assessee. These again did not contain complete addresses of the parties whose agricultural produce was sold by the assessee. Similarly, the learned Departmental Representative submitted that the weekly statements submitted to the market committee do not contain the complete addresses of the sellers which the assessee was required to maintain. Thus, he submitted that none of these documents referred to by the learned Counsel establish the identity of the sellers of the agricultural produce. He also refuted the submissions of the assessee that Form 'J' were the bearer cheques. He submitted that the farmers were poor people living in debts. They could not afford to leave sale proceeds with the assessee for a number of months without getting even part of the same. He submitted that in the subsequent year when payments were made to the farmers, the same were shown only by book entries. No receipts or any other documentary evidence indicating payments made to the farmers were produced before the authorities below and even before the Tribunal. He submitted that whole exercise of not disclosing the names of the actual sellers of the produce in the Heap register, 'J' Forms, 'GH' Forms and weekly returns submitted to the market committee was only with an intent to show bogus liability in the books of account of the assessee. He further submitted that the present case could be decided having regard to the human probability. He relied on the judgment of Hon'ble Supreme Court in the case of McDowell & Co. Ltd. v. CTO , where it was held that colourable devices could not be part of tax planning and it was wrong to encourage or entertain belief that it was honourable to avoid the payment of tax by resorting to dubious methods. He further relied on the judgment of Twinstar Holdings Ltd. v. Anand Kedia, Dy. CIT and Ors. whereby relying on the judgment of Hon'ble Supreme Court in the case of McDowell & Co. Ltd. v. CTO (supra), it was held that the transaction even if genuine but that motive to evade tax can be struck down. He further relied on the judgment of Delhi High Court in the case of Bhagat Construction Co. (P) Ltd. v. Asstt. CIT , where it was held that a "colourable device" is a colourable transaction which is seemingly valid but a feigned or counterfeit transaction entered into for some ulterior purpose. A conclusion about the nature of the transaction whether it was colourable or otherwise if supported by material or evidence is essentially one of fact. He submitted that in the present case, the assessee has miserably failed to establish the identity of the creditors; complete addresses of the parties have not been recorded in 'J' Forms, Heap registers and weekly returns submitted to the market committee only with an intention to hide identity of the parties. Despite repeated opportunities allowed to the assessee, it failed to produce any of the parties except one. He submitted that in the present case, the assessee had not been able to satisfy even the first ingredients of the identity of the creditors much less of proving the subsequent part about the creditworthiness and genuineness of the transaction. He also stated that mere fact that one Heap register or other records maintained under the bye-laws of market committee does not mean that it would override the provisions of Section 68 of the IT Act. He further stated that the issue regarding rejection of books of account is not at all relevant for the purpose of making addition under Section 68 of the IT Act. Thus, he submitted that the AO has rightly made the impugned addition and the learned CIT(A) has rightly sustained such addition.

7. We have heard both the parties at some length and given our thoughtful consideration to the rival submissions with reference to facts, evidence and material on record. We have also gone through the orders of the authorities below and referred to the relevant pages of the paper book to which our attention has been drawn. Since the judgments/decisions cited at the (Bar) were not found to be directly applicable to the facts of the present case, we have also tried to look into some other judgments of the High Courts where identical issue came to be considered. From the facts discussed above, it is obvious that the amount of Rs. 60,87,326 standing to the credit of 51 parties for which the addition was made, was shown in the balance sheet under the head 'sundry creditors'. The first issue that requires to be considered is whether provisions of Section 68 are attracted to such credits or not. In order to answer this question, it would be appropriate to reproduce hereunder the provisions of Section 68, which read as under:

Section 68 : Where any sum is found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the nature and source thereof or the, explanation offered by him is not, in the opinion of the AO, satisfactory, the sum so credited may be charged to income-tax as the income of the assessee of that previous year.

A bare reading of Section 68 of the Act shows that the expression used in the section is 'any sum' and it does not say that credit should be only in the nature of cash receipt. The expression 'any sum' is very wide and general in nature. It covers all credits including loan, receipts and any other amount of similar nature. The credits shall also include both loans and trade credits and also other receipts, be that of cash or kind. These may be in the name of the assessee, i.e., capital account or in the name a of third party. In the case of Gumani Ram Sin Ram v. CIT , the Hoh'ble Punjab & Haryana High Court has held that Section 68 of the IT Act, 1961, makes no distinction between credits held in the name of the assessee and those held in the name of third party. The onus is on the assessee to explain the source and to satisfy the AO that the credits shown in the books are genuine. In the case of Smt. Shanta Devi v. CIT (supra), the Hon'ble Punjab & Haryana High Court held that Section 68 of the Act, refers to credits in the books of the assessee. It was held that where a partner did not maintain any books of account and a cash credit entry appeared in the books of the firm in the name of the partner, Section 68 would apply and the amount of the cash credit would be liable to be assessed in the hands of the firm because the entry appeared in the books of account of the firm which was a separate entity from its partner. In the present case also, these credits appeared in the books of account of the assessee. Therefore, these are liable to be considered in the hands of the assessee as per provisions of Section 68 of the Act. Further in the case of Roshan Di Haiti v. CIT (supra), the assessee carried on business of gold and jewellery in Lahore till June, 1947. In June, 1947, the assessee transferred from Lahore the sum of Rs. 12,094, Rs. 13,000 and Rs. 6,000 to banks in New Delhi. The assessee left Lahore for Mussoorie in June, 1947, with a sealed trunk containing gold ornaments, jewellery and cash which he deposited in the Imperial Bank at Amritsar. He stayed in Mussoorie till October, 1947, where he did not carry on any business or had any means of income. In October, 1947, the assessee came to Delhi and secured premises for commencing business in February, 1948. The first entry in the books of account of the assesses was dt. 30th March, 1948, bringing in an aggregate capital of Rs. 3,33,414 including gold ornaments for Rs. 1,19,320, gold rawa for Rs. 1,69,020 and stones for Rs. 4,000 and bank and cash balances amounting to Rs. 38,074. When asked to explain the source of capital brought into the business, the assessee explained that gold and other related items were brought from Lahore in sealed trunk. On enquiry, the AO found that the assessee did not have flourishing business at Lahore prior to June, 1947. The AO accepted the source of Rs. 20,000 and brought to tax remaining amount of Rs. 3,13,414 credited to the capital account as income from undisclosed sources. This matter was subject-matter of further appeal before the AAC, the Tribunal and the High Court, where addition was reduced to Rs. 2,33,414 by the Tribunal and the High Court. When the matter came up before the Hon'ble Supreme Court, it was observed that the Tribunal and the High Court ought to have taken into account the fact the utter improbability amounting almost to impossibility of the assessee having earned such a large amount of Rs. 3,33,414 as profit within a few months in the disturbed conditions which then prevailed in India. It was also held that where the name and source of a receipt, whether it be of money or of other property, cannot be satisfactorily explained by the assessee, it is open to the Revenue to hold that it is the income of the assessee and no further burden lies on the Revenue to show that income is from any particular source. The relevant findings of the Hon'ble Supreme Court on p. 940 are as under :

The law is well settled that the onus of proving the source of a sum of money found to have been received by an assessee is on him. If he disputes the liability for tax, it is for him to show either that the receipt was not income or that if it was, it was exempt from taxation under the provisions of the Act. In the absence of such proof, the Revenue is entitled to treat it as taxable income. To put it differently, where the nature and source of a receipt, whether it be of money or of other property, cannot be satisfactorily explained by the assessee, it is open to the Revenue to hold that it is the income of the assessee and no further burden lies on the Revenue to show that income is from any particular source.

Thus, the order of the High Court for reducing the addition of Rs. 2,33,414 was reversed and that of the AO restored. Thus, it is clear from the facts of the case that even though amount credited to the capital account included gold ornaments, i.e., in kinds and partly in cash, the addition of the entire amount was upheld. Thus, from the above discussion, it is very clear that the provisions of Section 68 are wide enough to cover all credits including credits of the nature found in the books of account of the assessee. The submission of the assessee that provisions of Section 68 apply only to cash receipt/loans is without any merit. To give such a narrow meaning to Section 68 would be contrary to the legislative intent and the ratio of judicial pronouncements of the Supreme Court and the High Courts. Therefore, this submission is rejected.

7.1 Having held that provisions of Section 68 are applicable to the present case, the next important issue that requires to be decided is whether the addition in this case was called for. In order to answer this issue one needs to take into account relevant facts of each case. Now the most significant facts relating to this case are that the assesses was a 'Katcha Arhatia'. The role of Katcha Arhatia is to provide a platform to the sellers to sell their produce in the market. The transactions of purchase and sale made at the business premises of the Katcha Arhatia did not represent his own purchases and sales. He only acts as a commission agent on behalf of the seller and the buyer. Now the factum that the purchases of Kapas and Narma were indeed made on the dates are fully supported by documentary evidence. There is no dispute about the fact that the sale of Kapas and Narma is covered by Punjab Agricultural Produce Markets Act, 1961. The auction of the items sold took place in the presence of officials of the market committee. The receipt of Kapas and Narma on the respective dates is supported by entries in Heap register maintained by the assessee under the Punjab Agricultural Produce Markets Act, 1961. Copies of the same are placed at pp. 30 to 35 of the paper book. The auction is supported by Form 'J' which contained details of the name of the seller, rate at which sold, the person who purchased the goods, rate, total amount etc. Specimen copies of the same have been placed at pp. 36, 38, 40 and 42 of the paper book. Besides, sale of such produce is also supported by weekly returns submitted to the market committee and duly certified by the secretary, market committee (copies placed at pp. 44 to 61 of the paper book). Besides, purchases of these items are also supported by "GH" Forms issued to the purchaser of the crop as per market committee regulations (copies placed at pp. 62 to 65 of the paper book). Further, these. transactions have also been subjected to payment of market fees. The assessee has received "Darm" on these transactions which is accounted for in the books of account. Besides, these purchases have been duly accounted for by the concerns owned by the assessee's father and brother in their own books of account. The quantity purchased was processed and ginned and corresponding sales were shown by those concerns. It was argued before us that the transactions of purchases and sales were accepted by the Revenue while completing the assessment in their individual cases. Thus, the documentary evidence established beyond doubt that agricultural produce in the form of Kapas and Narma equal to the quantity shown was Indeed purchased/sold on the respective dates.

7.2 However, what the assessee has not been able to establish and the Revenue has been able to establish is that the produce in the form of Kapas and Narma was indeed purchased from 51 parties mentioned in the assessment order for which addition was made by the AO. This finding is supported by the enquiries made by the AO during the course of assessment proceedings, i.e., the non-service of enquiry letters by postal authorities on 12 persons, the statements of the two persons and village Sarpanches recorded by the Inspectors during the conduct of enquiries and inability of assessee to produce any of these 51 parties before the AO. The fact is that complete addresses of the farmers have not been recorded in the Heap register, in Forms 'J', in Forms 'GH', books of account maintained by the assessee, weekly returns submitted to the market committee, etc. The omission of their complete addresses in the aforesaid documents/ records could not be a matter of just coincidence. The question also arises why the agriculturists who are not liable to income-tax would hide their identity and give wrong names and addresses. This is all the more surprising when the payments for the purchases made from them were not made immediately on purchase. The amounts in question were paid in the subsequent assessment year. Now in such a case, no reasonable person with normal prudence would like that his correct name and address should be omitted in the records of the commission agent. What is further surprising in this case is that assessee is not able to give any valid reason why such persons were not available or why they have given their wrong names and addresses. Moreover, it is not a case where the identity of only a few persons is not established, the number is 51 out of 52, which is too large. Only identity of one person was established. Besides, the assessee has not been able to produce any documentary evidence in the form of stamped receipts/simple receipts when amounts covered by the purchase of agricultural produce were paid to the parties in the subsequent assessment year. The payments for purchases have not been made by cheques/through banking channels. Besides, the assessee was duly confronted with the fact of non-existence of the parties at the given villages. The statements of the Sarpanches and other material gathered during the course of enquiry in the assessment proceedings was duly confronted to the assessee. It is clear from discussion of p. 11 of the assessment order. In fact, on the same page, the AO has also mentioned that the assessee conceded before him that he would not be able to produce or even identify the persons because most of the transactions were not frequent and regular. In fact, neither during the course of assessment proceedings and before the CIT(A) nor before us, the assessee has produced any evidence or placed any materials to show that these parties/farmers existed in the respective villages. The assessee has not filed any affidavit of any of the persons about their existence in the respective villages or even the affidavits of Sarpanches falsifying the claim of the Revenue that none of these persons existed in the village, 7.3 We have already stated that the provisions of Section 68 are applicable to the facts of the present case. Now the question arises whether the addition is required to be made in the hands of the assessee or in the hands of two sister-concerns, who had actually purchased the agricultural produce in auction through the assessee. We have already held that the purchases made by the sister-concerns in open auction in the presence of officials of market committee supported by documentary evidence are genuine. It is also a fact that the amounts due from them have been shown outstanding and the nature of such credits is the purchase of cotton and Narma from the assessee and such entries appear in their books of account. The assessee in his books has shown the amounts due from his sister-concerns as sundry debtors and the corresponding credit entries in their books of account justify such action. Therefore, no fault can be found with the entries made in their books of account of the sister-concerns because their balance sheets depict correct position about their assets and liabilities. But if the credits appearing in the balance sheet remain unexplained, the same would warrant addition in this case because the credits appear in the balance sheet of the assessee. If these credits are not genuine, the balance sheet would show the difference on asset aside higher than the total of liabilities. Therefore, the addition under Section 68 would be called for in this case and not in the cases of sister-concerns.

7.4 Both the parties have cited catena of judgments/decisions before us. It is settled position that decision of a particular Bench or Court takes its colour and shape from the facts of the case and the issue raised before the Court. Reliance in this regard is placed on the judgment of Hon'ble apex Court in the case of CIT v. Sun Engineering Works (P) Ltd. , where the Hon'ble Supreme Court observed that it was neither desirable nor permissible to pick out a word or sentence from the judgment of the Supreme Court divorced from the context of the question under consideration and treat it to be complete law declared by the Court. The judgment must be read as a whole and the observations from the judgment have to be considered in the light of the questions which were before the Court. The apex Court further observed that a decision of the Supreme Court takes its colour from the questions involved in the case in which it is rendered and, while applying the decision to a later case, Courts must carefully try to ascertain the true principle laid down by the decision. Now in many cases relied upon by the learned Counsel, the ratio was that until books of account were rejected, no addition could have been made on account of unverifiable purchases. The facts of those cases are distinguishable. In those cases, the purchases and sales made were assessee's own trading sales. The AO made additions on account of unverifiable purchases because the parties from whom these purchases have been made were not found in existence. However, the AO did not doubt the corresponding sales made against the purchases. The view taken by the Benches was that since the AO had not doubted the sales, there was no question of making any addition on account of unverifiable purchases. This point can be illustrated by giving an example. Let us say that the assessee is engaged in the business of trading and he had shown sales of items weighing 100 qtls. However, the AO on verification found that purchases equal to 20 qtls. were not verifiable because the party from whom such purchase was made was not found existing. The AO, without disturbing the sales of 100 qtls. choose to make an addition on account of unverifiable purchases in respect of purchases weighing 20 qtls. Such addition could not be upheld for the reason that the AO has not adjusted the corresponding sales shown against the bogus purchase. But these are not the facts of the present case. The assessee is not engaged in the business of trading in Kapas and Narma and all transactions of sale and purchase are effected only as a commission agent on behalf of other parties. Therefore, the ratio of all these decisions relied upon by the assessee has to be seen in the light of facts of the present case. These distinguishing features have been highlighted in the preceding paragraphs where submissions of the learned Counsel have been recorded. Most of other decisions relied upon by the learned Counsel are on the issue of rejection of book results in the light of specific defects found in the books of account or even low yield in respective cases where the question related to estimation of income by applying the provisions of Section 145(2) of the Act. But in the present case, the assessee has not carried on any trading on its own. He has earned income by way of Dami on the transactions effected through him as a commission agent. Income received by way of Dami is fully supported by documentary evidence. Therefore, the question of rejection of book results does not arise in the present case. Moreover, there is nothing in Section 68 of the Act that books of account must be rejected before making an addition under this section. This is an independent and deeming provision and will apply if the assessee fails to offer an explanation of the source of particular receipt/credit appearing in the books of account or if the explanation given by the assessee is found to be not satisfactory by the AO.

7.5 The learned Counsel for the assessee has also raised objection that the AO has relied on the submissions recorded by the Inspectors which are not valid in the eye of law. We have considered this objection but we do not find any merit in the same. The facts detailed above clearly show that when enquiry letters were sent by registered post to 12 parties at the addresses given by the assessee, these were returned 'unserved' with the remarks of the postal authority 'not known'. Thereafter, the AO deputed Inspectors to serve summons under Section 131 of the IT Act and make enquiries about the transactions shown in their names in the books of account of the assessee. Such enquiries revealed that except two parties, none of the other were found existing in the respective villages. The Inspectors recorded the statements of two persons who were found existing at the given villages. Out of the two persons, the Inspector found that Sh. Harminder Singh had not sold any agricultural produce through the assessee. He also stated that he sold his crops through Kundan Kumar Sarswan Kumar of Raman Mandi for the last many years. His statement was recorded in support of the fact that Inspector had made such enquiry. Similarly, credit was shown in the name of one Sh. Tej Ram S/o Manjit Ram of Village Bariwala. On enquiry, it was found that there was no person by name of Sh. Tej Ram, but there was a firm of M/s Tej Ram Manjit Ram, who denied having sold any cotton and Narma through the assessee. Besides, the Inspectors had recorded statements of the village Sarpanches in support of their enquiries that no such person was found existing at the relevant villages. The results of all these enquiries were duly confronted to the assessee. The assessee has not rebutted the results of enquiries and has not filed any affidavit or confirmation to show that the remaining persons were found existing in the respective villages or the facts reported by the Inspectors were incorrect or wrong. On the contrary, assessee admitted before the AO that he was not able to produce or even identify the persons because most of the transactions were not frequent and regular. The assessee never desired to have cross-examination of the village Sarpanches with whom the Inspectors had made enquiries. We may further mention that the AO is vested with power to cause enquiries made through his Inspectors. In fact, Section 133A confers powers on the IT authorities to carry out survey. The AO can take such action himself or through a person authorized by him. Section 133A confers powers on an IT authority. Clause (a) of Explanation to Section 133A defines IT authority which "also includes an Inspector of IT". Clause (iii) of Sub-section (3) of Section 133A also confers powers of an 'IT authority' to record the statement on any person which may be useful for, or relevant to, any proceeding under this Act. Thus, it is not correct to say that the Inspector cannot record the statement of any person. The AO has made enquiries through his Inspectors in exercise of the powers conferred under the Act. Moreover, such enquiries only confirmed the fact that the persons have not been found existing at the given villages and obviously they have not sold the cotton and Narma through the assessee. No material has been placed by the assessee to controvert such findings. In fact, when assessee was confronted with the results of such enquiries and given copies of statements recorded by the Inspector, no request was made to the AO for allowing an opportunity of cross-examination. Thus, the objection raised in this regard is untenable.

7.6 Now the question that requires to be considered is whether failure on the part of the assessee in establishing the identity of the creditors could equally apply to the facts of the present case, when the factum of purchases made through the assessee has been established. The failure of the assessee is only to prove that purchases were made from persons in whose names these were shown.

Similar issue where purchases of raw materials made from non-existing party were treated by AO as "income from other sources" came to be considered by the Hon'ble Delhi High Court in the case of CIT v. LA Medica (2001) 168 CTR (Del) 314 : (2001) 250 ITR 575 (Del). The facts of that case were that assessee had shown purchases of raw materials worth Rs. 3,82,750 from a party. On an enquiry, the AO found that party did not exist at the given address. Thereafter, summons were issued to the agent of the bank through whom the payments were made for the purchases. It was found from the bank records that the bank accounts were opened by 'C' on introduction by 'S' giving another fictitious address at Delhi. Therefore, on the basis of the material available on the record, the ITO treated the sum of Rs. 3,82,750 as income from undisclosed sources. On appeal, the AAC was of the view that though the circumstances were not clear yet the fact remained that the goods had been pledged with the bank after the alleged purchase. It was, therefore, concluded that non-existence of the seller could not be the basis for doubting the genuineness of the purchase and/or to infer that there were fictitious purchases. On appeal by the Revenue, the Tribunal held that notwithstanding the suspicious circumstances, the fact remained that the purchases were made, items purchased were pledged and merely because of the involvement of some persons who gave fictitious addresses, the fact that the purchases were made, could not be doubted. On these facts the Hon'ble Delhi High Court held that the order of the Tribunal was perverse as the Tribunal had acted on irrelevant material. The relevant findings recorded by the High Court on p. 576 (head notes) are as under:

Held, that the Tribunal had not taken into consideration relevant materials and had acted on irrelevant materials. The question before the Tribunal was not whether purchases were made from another concern. What was under consideration was whether the purchases were made from K as was claimed by the assessee. Once it was accepted that the supplies were not made by K to whom payments were alleged to have been made, the question whether the purchases were made from some other source could not have weighed with the Tribunal as a factor in favour of the assessee. The conclusions of the Tribunal were, therefore, clearly erroneous, contrary to the materials on record and had been arrived at without taking into consideration relevant material and by placing reliance on irrelevant materials. Where the Tribunal acted partly on relevant and partly on irrelevant materials, and it was not possible to say to what extent the latter had influenced its mind, the finding was vitiated because of the use of irrelevant material. The Tribunal had no material to come to the conclusion that the sum of Rs. 3,82,750 could not be treated as the assessee's income from undisclosed 'sources.

The facts of the present case are, more or less, similar to the case before Delhi High Court. In the present case also the parties in whose names transactions of sale have been shown and credits appear in the books of account of the assessee are non-existent. In fact in the case of CIT v. LA Medica (supra) the payment for purchase of raw materials had been made through bank account. In the present case, the payments to the parties were made in cash by way of entries in the cash book which are not supported by any receipts or any other independent documentary evidence. In any case, it is established that persons to whom payments have been shown had not indeed received the same. Thus, the ratio of the judgment of Delhi High Court in the case of CIT v. LA Medica (supra) "that once it was accepted that the supplies were not made by 'K' to whom payments were alleged to have been made, the question whether the purchases were made from some other source could not have weighed with the Tribunal as a factor in favour of the assessee" would equally hold good and apply to the present case.

7.7 Similar issue also came to be considered by the Gujarat High Court in the case of CIT v. M.K. Brothers . The facts of the case were that assessee had shown purchases of pig iron, scrap and steels amounting to Rs. 52,254 from four parties. The assessee was asked to produce the parties with their books of account and pass books, etc., for examination and adduce all evidence which the assessee wanted to produce in support of its contention for genuineness of purchases. The assessee was engaged in the business of manufacture of spindles and machinery spare parts and the payments for purchases of Rs. 52,254 were made by cheques after some time. Initially, the purchases were shown on credit basis. In the meantime, some of these parties had admitted to the sales-tax authorities that they had issued bogus vouchers. On these facts, the ITO held that purchases were not genuine and assessed the amount of Rs. 52,254 as income of the assessee from undisclosed sources. On appeal, the Tribunal found that there was no evidence to show that bogus vouchers had been issued to the assessee and the payments for purchases were made by cheques and there was no evidence that amount paid by cheques had come back to assessee. Therefore, the Tribunal deleted the addition. On a reference, the High Court answered the question in favour of assessee and against the Revenue by recording following findings in last paragraph on p. 251 of 163 ITR :

On a perusal of the order of the Tribunal, it clearly appears that whether the said transactions were bogus or not was a question of fact. The Tribunal has also pointed out that nothing is shown to indicate that any part of the fund given by the assessee to these parties came back to the assessee in any form. It is further observed by the Tribunal that there is no evidence anywhere that these concerns gave vouchers to the assessee. Even the two statements do not implicate the transactions with the assessee in any way. With these observations, the Tribunal ultimately has observed that there are certain doubtful features, but the evidence is not adequate to conclude that the purchases made by the assessee from these parties were bogus. It may be stated that the assessee was given credit facilities for a short duration and the payments were given by cheques. When that is so, it cannot be said that the entries for the purchases of the goods made in the books of account, were bogus entries. We, therefore, do not find that the conclusion arrived at by the Tribunal is against the weight of evidence. In that view of the matter, we answer the question in the affirmative, that is, in favour of the assessee and against the Revenue. Accordingly, the reference stands disposed of with no order as to costs.

The distinguishing feature of the facts of the present case is that in none of these cases, persons from whom the assessee had shown the purchases had been found existing and also the payments have not been made by cheques. In fact, there is no evidence that payments were made to these parties to whom these had been shown in the books by way of entries in the cash book. Further, addition in the case before Gujarat High Court was made on account of bogus purchases and the addition in the present case has been made on account of unexplained credits.

Thus, it is clear from the ratio of these decisions that the matter has to be decided on the basis of its own facts and the assessee is required to establish the factum of existence and identity of the parties and the fact that these persons had actually sold the produce to assessee. These are the peculiar facts of the present case and the reality of these transactions need to be established by the assessee.

7.8 However, we find substantial force in the grievance of the assessee that AO took up the issue at the fag end when the same was getting time-barred. The AO asked the assessee to produce these persons by his letter dt. 8th March, 2004. The assessee was supplied with copies of Inspector's reports only on 22nd March, 2004 and assessee was asked to produce the parties by 26th March, 2004. The assessee's letter dt. 26th March, 2004 to AO is on our record. On p. 2 of the letter, the assessee has stated that it will not be out of place to mention that many villages of the same name are located in different districts of Punjab, Haryana and Rajasthan. On p. 3 of the said letter, the assessee also stated that sufficient time may be allowed to locate and identify such persons for being produced before the AO. We also find that assessee had taken following specific ground before the CIT(A) which is reproduced as ground No. 7 on p. 2 of the impugned order :

7. The learned Asstt. CIT has not afforded any opportunity to the appellant for rebutting the cross-examining (of) the statement recorded and information gathered by the Inspectors and other inquiries made in the absence of the appellant. These proceedings are illegal ab initio in the eyes of law.

We also find that the assessment was completed on 29th March, 2004. Thus, the whole exercise of asking the assessee to produce 52 parties was during the period from 8th March, 2004 to 26th March, 2004. This, in our view, could not be considered as sufficient time allowed to the assessee when the persons were not located at the same place. Besides, the assessee was confronted with the material gathered during the course of enquiries made by the Inspectors and statements recorded only on 22nd March, 2004. Thus, there was hardly any time given to the assessee for making any effective representation. The learned CIT(A) has summarily disposed of this ground. Thus, we find force in the submission of assessee. Therefore, in order to be fair to the assessee, we consider it appropriate to set aside the order of CIT(A) and restore the addition to the file of AO for deciding the same afresh as per law and after affording sufficient and reasonable opportunity to assessee to produce the parties before him. The assessee shall be free to furnish fresh evidence which the AO may consider at the time of completing the set aside assessment. We order accordingly. These grounds of appeal are treated as allowed for statistical purpose.

8. The next issue raised in this appeal relates to sustaining an addition of Rs. 3,86,563 on account of alleged diversion of income under the head 'Dami'. The facts of the case are that in the P&L a/c, the assessee had shown receipt from Dami at Rs. 1,48,923. After adjusting shop expenses and depreciation, net profit from Dami was shown at Rs. 46,893. However, during the course of assessment proceedings, the AO noticed that actual receipt of Dami was Rs. 5,35,486 whereas in the P&L a/c, only an amount of Rs. 1,48,923 was shown. When the assessee was asked to explain the discrepancy, the assessee explained that out of gross Dami received, the assessee had refunded 75 per cent of the same to its sister-concerns, namely, M/s Maya Cotton & General Mills, Kotkapura, the proprietary concern of Sh. Baljit Singh brother of the assessee and M/s Gee Ess Ahuja Cotton & General Mills, Kotkapura, the proprietary concern of assessee's father. The AO thereafter, verified the income-tax records of the two sister-concerns and noticed that they had not shown any Dami receipt in their own returns. When the AO pursued the enquiry further, the assessee furnished self-made copies of trading account in the case of both sister-concerns. The AO also noticed that in the case of M/s Gee Ess Ahuja Cotton & General Mills, income was shown at nil in the return and entire TDS amount of Rs. 35,093 was claimed as refund. Similarly, in the case of M/s Maya Cotton & General Mills, taxable income was shown at nil after claiming current depreciation and unabsorbed depreciation. It was only in the case of the assessee that he had taxable income. Therefore, he observed that the purpose of diverting the Dami was only to avoid tax by the assessee. The AO made further enquiries and recorded the statements of Sh. Gurcharan Singh, father and proprietor of M/s Gee Ess Ahuja Cotton & General Mills, Kotkapura and Sh. Baljit Singh, brother of the assessee and proprietor of M/s Maya Cotton & General Mills. Both stated that they made purchases of cotton and Narma through the assessee who was a commission agent. They also stated that the assessee did not know many persons who grow cotton. Since they were engaged in the business of cotton ginning, some persons or small traders who purchased the Kapas and Narma from villages, approached them to sell the produce. They recommended the name of the assessee for making their sales. It was also stated that as per bye-laws of the market committee, they could not purchase the Kapas and Narma directly from the farmers. Therefore, the name of assessee was recommended. They stated that they took responsibility for making payments of the purchases. However, when asked to furnish the names and addresses of the parties who were recommended to assessee to sell their produce, both replied that this was not known to them. They also admitted that such persons were not personally known to them. However, they stated that commission was paid to them for introduction and the responsibility of the payments to the agriculturists. The AO observed that Sh. Baljit Singh did not even know the names and addresses of the persons who were sent to assessee for sale of Kapas and Narma through the assessee. He also observed that there was no written agreement or documentary evidence available for payment of 75 per cent of the commission to sister-concerns. The AO, therefore, concluded that Dami paid to the two sister-concerns was only a diversion of income with a view to reduce the tax liability. Accordingly, the AO made an addition of Rs. 3,86,563.

9. Aggrieved, the assessee filed an appeal before the CIT(A). The written submissions filed before him were considered. The learned CIT(A) upheld the disallowance on the ground that it was clear from the statement of Sh. Baljit Singh that he did not even know the names and addresses of the persons who were sent to M/s Ahuja Bros. The date when verbal agreement was entered into was also not known to the parties. He also took notice of the fact that the party had concealed the payment and receipt of commission in their trading and P&L a/c. Even the position regarding payment made to persons covered under Section 40A(2)(b) was not reported despite required to do so under the Act. He also observed similar position in the case of Sh. Gurcharan Singh. Thus, he upheld the addition. The assessee is aggrieved with the order of the CIT(A). Hence, this appeal before us.

10. The learned Counsel for the assessee Sh. Sudhir Sehgal, reiterated the submissions which were made before the authorities below. He submitted that the assessee being a Katcha Arhatia, was not required to get its accounts audited under Section 44AB of the Act. He submitted that the assessee was new to the business. He drew our attention to year-wise receipts of Dami which amounted to Rs. 3,23,022, Rs. 5,34,288, Rs. 6,58,581 and Rs. 17,16,654 for the asst. yrs. 1999-2000, 2000-01, 2001-02 and 2002-03, respectively. He submitted that it was only due to encouragement from his father and his brother that the assessee was able to achieve such high turnover and earned substantial amount by way of Dami. He stated that both his brother and father undertook the responsibility for making the payments against purchases made through the assessee. He submitted that the objection of the Revenue that there was no written agreement with the two concerns was without any merit for the reason that it was not necessary that such written agreement must exist. He submitted that in the written statements recorded by the AO both Sh. Gurcharan Singh Ahuja and Sh. Baljit Singh Ahuja confirmed that they used to send persons who come to them to sell cotton and Narma. He stated that they were also assured of payments to them. He stated that what was relevant was the commercial expediency for the benefit of the assessee. Whether that benefit is to accrue immediately or after sometime was not relevant. He further relied on the following judgments of various Courts :

(i) Aluminium Corporation of India Ltd. v. CIT where it was held that the agent was entitled to commission on all sales whether made through agent or directly as he was responsible for ensuring fulfilment of all the contracts.

(ii) J.R. Patel & Sons (P) Ltd. v. CIT , where it was held that in deciding whether payment was made for the purposes of business, the correct approach would be to see whether it was made on grounds of commercial expediency for the ultimate benefit of the business. Whether that benefit is to accrue immediately or after the lapse of time and whether directly or indirectly was immaterial.

(iii) Addl. CIT v. Kuber Singh Bhagwandas , where it was held that payment should be judged on the basis of commercial expediency.

(iv) CIT v. Bharat Collieries Ltd. (1968) 68 ITR 42 (Pat) where it was held that high rate of commission for first sale in new area was held to be allowable.

(v) Sanjeevi & Co. v. CIT (1966) 62 ITR 156 (Mad). The jurisdiction of the Revenue is confined to decide the reality of the expenditure, namely, whether the amount claimed for deduction was factually expended or not, and whether it was wholly or exclusively incurred for the purpose of business.

(vi) CIT v. Jay Engineering (1987) 66 CTR (Del) 179 : (1988) 172 ITR 341 (Del), where it was held that whether expenditure was incurred wholly and exclusively for the purpose of business was essentially a question of fact.

(vii) Sassoon J. David & Co. v. CIT , where the fact is that somebody other than the assessee is also benefited by the expenditure should not come in the way of an expenditure being allowed by way of deduction under the IT Act.

(viii) Jamshedpur Motor Accessories Stores v. CIT , where commission on sale of motor trucks to employees in addition to salary because of commercial expediency was held to be justified.

(ix) Narsingdas Surajmal Properties (P) Ltd. v. CIT , where it was held that it matters little whether expenditure has been incurred on the basis of valid or invalid agreement/document. If it was incurred for the purpose of business, the assessee would be entitled to deduction.

The learned Counsel further argued that the assessee had not concealed the fact of payment of commission because only the net amount after debiting payments to the sister-concerns was shown in the P&L a/c.

11. The learned Departmental Representative, on the other hand, heavily relied on the orders of the authorities below. He also drew our attention to the fact that assessee had not shown payments made to two sister-concerns in the P&L a/c. It was only after inquiries were made during the course of assessment proceedings that the AO noticed that Dami receipts were Rs. 5,35,481 and not of Rs. 1,48,923. He further stated that even two sister-concerns to whom the commission was paid had not shown receipt of the same in individual returns. It is only when query was raised, the assessee filed self-made copy of trading account of the two concerns. He further stated that in the statements recorded, none of the persons could tell name of a single person who was sent to the assessee for selling their agricultural produce. Thus, he submitted that it is a clear case of diversion of income and the order of the CIT(A) does not merit any interference.

12. We have heard both the parties and carefully considered the rival submissions, examined the facts, evidence and material on record. It is settled law that if the assessee claims deduction of any expenses, the burden of proof is on him to establish that such expenditure was incurred wholly and exclusively for the purpose of his business. Reliance in this regard is placed on the three judgments of Hon'ble Supreme Court in the case of CIT v. Calcutta Agency Ltd. , Lakshmiratan Cotton Mills Co. Ltd. v. CIT and L.H. Sugar Factory & Oil Mills (P) Ltd. v. CIT . There is no dispute about the fact that there is no written agreement between the assessee and two sister-concerns to whom 75 per cent of the commission had been paid. Even if there is no written agreement, the assessee could still claim deduction for the expenses provided he is able to establish with documentary and cogent evidence that such expenditure was incurred for the purpose of assessee's business. Now in this case, the assessee has not been able to lead any evidence about the nature of services rendered by two sister-concerns. In fact, we have gone through the copies of the statements of Sh. Gurcharan Singh and Sh. Baljit Singh to whom commission was paid. They were not able to show any record or evidence about the names of persons who were sent/recommended for selling their produce through the assessee. In fact, they simply stated that such parties were not known to them. Now if these parties were not known to them and they have no record of the persons who were sent to the assessee, how it could be presumed that those parties who sold the produce through the assessee were sent by them. As regards increase in the 'Dami' receipts over the years, there is nothing on record to show that the increase was due to the efforts made by the assessee's two sister-concerns. In other words, there is no evidence whatsoever to support the claim of the assessee that they had rendered any services for which commission was paid when they did not even know them. As regards the payments assured by the sister-concerns, there is also no evidence for the same. In any case, when they had made purchases, they were duty-bound to make the payments. In fact, for substantial amounts of purchases made in the months of November, December, 2000 and January, 2001 through the assessee, the payments were delayed and were made only in the succeeding assessment year. Thus, the claim of the assessee for payment of 75 per cent of commission is not supported by any evidence direct or indirect. Therefore, it cannot be said that the assessee has discharged the onus to prove that the commission was paid wholly and exclusively for the purpose of his business. There does not appear to be any trade practice for sharing Dami with buyers of such produce. As regards the various judgments relied upon, the same are on their own facts. The question whether the assessee has established that the expenditure was incurred wholly and exclusively for the purpose of business is essentially a question of fact to be decided on the merits of each case. In case the assessees have been able to establish that payment was made wholly and exclusively for the purpose of business, the same would be allowable. The claim of the assessee also requires to be seen in the light that such payments had been made to its sister-concerns and not to outside parties. Therefore, it was all the more necessary for assessee to establish that payments were made for the services rendered by them. In the absence of any evidence and material on record, we are of the view that authorities below were justified in disallowing the claim. Thus, in the light of these facts and circumstances of the case, we are of the considered opinion that the order of the CIT(A) does not merit any interference and this ground of appeal is dismissed.

13. In the result, the appeal is partly allowed for statistical purposes.