Income Tax Appellate Tribunal - Kolkata
Sagar Bose vs Income-Tax Officer on 24 May, 1995
Equivalent citations: [1996]56ITD561(KOL)
ORDER
R. Acharya, Accountant Member
1. This is an appeal instituted by the assessee against the order of the CIT (Appeals) for the assessment year 1990-91.
2. The assessee carries on business of manufacture and sale of spare parts, wagon components etc. and also acts as general order supplier under the name and style of M/s. BPM Engineering & Co. as sole proprietor. The first ground of appeal relates to the addition of a sum of Rs. 6,54,767 for the alleged bogus purchases by the assessing officer Assessing Officer (A.O.) and confirmation of the same by the CIT(A) without appreciating the full facts of the case.
3. Briefly stated, the facts of the case are that during the course of assessment proceedings the Assessing Officer conducted certain enquiries through inspector about the purchases of goods from different concerns and it was found by him that seven parties are non-existent and not traceable at the addresses given by the assessee. The inspector reported that in three cases no Municipal number existed. The Assessing Officer issued summons under Section 131 to four concerns but they were returned by the Postal authorities with the remarks "not known". Then these matters were brought to the notice of the assessee, and the assessee filed a letter dated 16-11-1992 on 20-11-1992 along with xerox copies of two purchase confirmations from M/s. Steel & Wire Supply Corporation and M/s. Lunar Enterprises and also xerox copies of purchase bills. The inspector further reported that M/s. Datoo was located and that the purchases from this concern are genuine. The Assessing Officer also accepted the purchases from two concerns from which confirmatory letters were filed. The inspector also met the Postmaster and Postman and informed that there were no such addresses in three of the cases. The Assessing Officer also asked the assessee vide letter dated 4-2-1993 to produce the seven concerns with their books of account as they were not traceable. In response to that the assessee expressed his inability in this regard and suggested the issue of summons to the above seven concerns for production of books of account. The assessee's suggestion was rejected by the Assessing Officer as according to him, it was of no use inasmuch as the above concerns were not traceable. The assessee vide his letter dated 16-11-92 explained that purchases were backed by account payee cheque and sales-tax registration numbers were printed in their bills. It was further submitted that all the purchased materials were consumed and thereafter respective sales were made and that there were payments of sales tax for the sales made by him. In order to prove the genuineness of the purchases the assessee further stated that the assessee has produced all documentary evidence about the sale and consumption of those related purchases. The Assessing Officer rejected all the explanations and arguments on the ground that the payments made by account payee cheques did not prove the genuineness of the transactions, inasmuch as the sellers were non-existent, that the sales-tax registration number in the bill did not prove the existence of the sellers and had nothing to do towards this end, that when sellers are non-existent how there could be purchases, consumption and sales, that the payment of sales tax on the amount of sales could not be a pointer towards genuineness of the purchases and in the absence of verification of purchases it could be assumed that the assessee had in his possession concealed stock and that it was wholly untrue that the assessee had produced all the documentary evidence about the sale and consumption of those related purchases from the aforesaid parties. Accordingly he treated these purchases as bogus and added the same as inflated expenses.
4. Being aggrieved by the order of the Assessing Officer the assessee has preferred an appeal to the CIT(A) and before the CIT(A) the assessee submitted that the payments against the purchases were made by the assessee by account payee cheques and the cheque serial number together with the name of the bank were written on the copies of the purchase bills and that the xerox copies of the relevant bank statements were also filed and if the bank officers were examined by the Assessing Officer the examination would have established the identity, existence as well as the present addresses of the seven suppliers. It was also argued that the conclusion of the Assessing Officer was based on the report of the inspector and the reports of the inspector are not at all admissible as material piece of evidence in the instant case. It was also contended that the conclusion of the Assessing Officer was based on the four envelops containing summons which were returned undelivered by the Postal authorities with their remarks "not known" or "not found" as mentioned in the letter dated 5-1-1994 and these envelops were never shown to the assessee nor certified copies of the aforesaid documents were granted to the assessee in spite of repeated request to this effect and, therefore, such material are also not admissible as material evidence in this case. The assessee further explained that the expression "not known" and "not found" given by the Postal authorities had different meaning and legal connotation and, therefore, the summons which were returned with the remarks cannot be deemed to have been duly served upon the concerned suppliers. In order to support the contention the learned counsel for the assessee relied on the decision of the Kerala High Court in the case of K.R. Venkilaperumal Raja v. CIT [1992] 193 ITR 213 at pp. 218 & 219. It was further pointed out that no proper enquiry or investigation was made by the Assessing Officer to verify the purchase transaction. Lastly the assessee contended that the Assessing Officer has accepted the turnover figure of Rs. 10,95,189 as shown in the books of account as correct and has assessed the gross profit at Rs. 8,98,216 which comes to 82.02% and, therefore, the margin of profit in such type of business is not only imaginary and unreal but also fictitious. The CIT(A) considered all the explanations, arguments and contentions of the assessee and confirmed the addition. The operative part of his order i.e., para 6 is quoted as under for the sake of convenience :-
I have considered the observation of the Assessing Officer in the assessment order and submissions of the appellant's A/R. I find that Assessing Officer has tried his best to verify the purchases from the seven concerns. The Inspector met the post master and sorting postman and both of them categorically informed that the premises as per the bills for the purchases were not existed. The summons under Section 131 issued to these parties came back unserved from the postal authorities because the parties were not traceable. In the circumstances, Assessing Officer wanted the cooperation of the appellant so that the seven parties can be examined and their location can be identified. But the appellant did not cooperate with the Assessing Officer in this regard. I agree with the Assessing Officer that further issue of summons under Section 131 would have served no purpose because the parties are non-existent and not traceable. Since the parties are not existing the payments made to them by cheques or the sales-tax registration No. cannot prove the transactions. After all, all these evidences cannot make non-existent parties as existent. So considering the facts of the case, I am of the considered opinion that Assessing Officer was perfectly justified in treating the amount of Rs. 6,54,767 as bogus purchase because the parties themselves are non-existent. The arguments on behalf of the appellant that such an addition will make the g.p. rate at 82% and so it is unreal appears to be not acceptable to me because the appellant might have shown the bogus purchase in the earlier years also which has been detected in the present assessment year. Since it is clear that the purchases of Rs. 6,54,767 are bogus such purchases cannot become proved only on this ground. In the circumstances the addition of Rs. 6,54,767 appears to be justified and is confirmed.
5. Being aggrieved by the order of the CIT(A) the assessee has preferred this appeal to the Tribunal. The learned counsel for the assessee Sri S.K. Tulsiyan filed a paper book containing 34 pages along with a copy of ITAT's decision in ITA No. 1735 (Cal.) of 1990 for the assessment year 1984-85 in the case of Novel Project Ltd. v. ITO, dated 27-9-1991 and submitted that the entire purchases of Rs. 6,54,767 have been declared by the Assessing Officer as bogus although the payments have been made by account payee cheques and corresponding supplies have been made to the Railway department against their orders which mentioned in the statement placed at pages 30 & 31 of the paper book. It is further argued that all the payments against these parties are by account payee cheques and this fact has not been disputed by the department and, therefore, the purchases cannot be said to be bogus. Sri Tulsiyan, the learned counsel for the assessee relied on ITAT's order (C-Bench, Calcutta) in the case of Novel Project Ltd. (supra), a copy of which has been filed along with the paper book and submitted that on similar facts and circumstances when payments were made by account payee cheques it was held by the Tribunal that no adverse inference against the assessee can be drawn by the department and the transaction cannot be treated as bogus. It was further submitted that the assessee engages several brokers for purchases and every three years in Howrah they change their place of business for the reasons best know to them. It is also clarified that the type of persons from whom purchases are made are very small and petty businessmen and they go on changing their business, names and addresses. The learned counsel for the assessee also stated that although the assessee supplied the names and addresses of all the parties vide letter dated 22-2-1993 and also requested the Assessing Officer to issue summons in order to examine them, yet the Assessing Officer failed to do so. The learned counsel further contended that the observation of the Assessing Officer that old stock was kept by the assessee," is based on surmises. It is also argued by him that if everything is bogus how the valid assessment is made. He also pointed out that no doubt summons under Section 131 were issued but they were not served on the assessee and, therefore, the department could not have presumed that the parties are not in existence. According to the learned counsel Shri Tulsiyan when the sales tax file No. was given and when the payments were made by account payee cheques and when no enquiry was made by the Assessing Officer, the parties cannot be said to be bogus. It is also stated that the books of account were subject to scrutiny and no defects were pointed out by the Assessing Officer. Lastly the learned counsel Sri Tulsiyan contended that the department has ignored all the relevant evidence furnished and produced by the assessee. According to him, there cannot be any bad motive on the part of the assessee as total purchases from these concerns were Rs. 6,76,038 and against those purchases sales wee effected at Rs. 9,36,679 with a resultant gross profit rate of 25% which is fair and reasonable and there was no need of further addition under Section 143(3) raising the gross profit at 82%. In view of this he urged that the addition made by the Assessing Officer and confirmed by the CIT(A) is bad in law and, therefore, the same should be deleted.
6. The learned departmental representative Sri R. Kumar on the other hand argued that there is no restriction in making addition to the total income of the assessee when the assessment is finalised under Section 143(3) and, therefore, this argument is irrelevant. He submitted that the addition is made after due enquiry is made by the inspector and after giving full opportunity of being heard to the assessee and the same was confirmed by the CIT(A) because the parties were not traceable at the given addresses. He also contended that the existence of notorious facts or general facts in Howrah is not to be recognised. It is further argued that since the sales tax is not paid by the assessee the argument of the learned counsel for the assessee is wrong and that although the sales tax file No. is given but it is of no relevance in the absence of existing parties. Sri R. Kumar, the learned D.R. also submitted that these bogus purchases are nothing but cash credits and, therefore, even if the payment is made by account payee cheques that is not enough to prove the transaction. In order to support his contention he relied on Calcutta High Court decision in the case of CIT v. Precision Finance (P.) Ltd. [1994] 208 ITR 465 and argued that the identity was to be proved by the assessee which has not been done. He invited our attention to page 32 of the paper book submitted by the assessee and expressed his grave doubt as to whether these statements were filed before the Assessing Officer. As regards the contention of the assessee that sales are taken into account but not the purchases, Sri Kumar argued that this statement was firstly not before the Assessing Officer and secondly it is of no relevance as the stock position and day to day tally is not there in the statement. It is further contended that before the CIT(A) no such argument was taken and no correlation could be made. He also pointed out that in this respect the gross profit is not relevant as the purchases are not supported by evidence and no reconciliation of opening stock, closing stock, purchases and sales is made and, therefore, the addition is in accordance with the provisions of law.
7. In reply, the learned counsel for the assessee Sri Tulsiyan submitted that these statements are not new piece of evidence and the Assessing Officer has admitted the bills, vouchers and books were produced along with bank pass book, names and addresses and copies of bank statements were examined by the Assessing Officer. Sri Tulsiyan also contended that purchases are not cash credits as payments were made against purchases and all the purchase bills were filed by the assessee and all these details along with sales effected are admitted by the Assessing Officer. Sri Tulsiyan further submitted that the CIT(A) was apprised of these statements as it is evident from the documents placed at pages 6 to 14 of the paper book which were before the CIT(A). According to the learned counsel for the assessee frivolousness of gross profit has not been sustained by the Courts and in the case of the assessee the gross profit rate is determined at 82% under Section 143(3) of the Act.
8. We have carefully considered the rival contentions, the relevant facts and material placed on the record. We have also gone through the decisions on which reliance has been placed by both the parties. We find that the assessee has produced books of account, bills & vouchers and the same were test-checked. The assessee also produced Savings Bank Pass Books of United Bank of India and State Bank of India and the same were examined by the Assessing Officer. It is also seen that the assessee has furnished names and addresses of suppliers and of persons to whom goods were sold and xerox copies of bank statements. Thus, we find that the primary onus of proving the purchases and sales has been discharged by the assessee by production of books of account, documentary evidences and other materials as mentioned above which were test-checked and examined by the Assessing Officer and it is admitted and mentioned by him in his assessment order.
9. The observations and findings of the AO that payments by account payee cheque did not prove the genuineness of the transaction, is neither correct nor tenable. It is noticed that no enquiry from the bank authorities to find out the final destination of money and the existence of the persons behind this scenario is made by the ITO. Account payee cheques are definitely deposited and encashed and are proved by the assessee by furnishing the bank pass book and the bank statement etc. Who prevented the ITO to enquire into and find out the truth from the banks is not known. As payments are made by account payee cheques they are certainly deposited in some bank accounts which are opened, maintained and operated by suppliers or by some other persons and the amount is credited in that account. Who are these persons to operate the accounts? Who introduced them to the bank, who deposited these account payee cheques and who is operating this account and withdrawing and enjoying money and whether these payments have reverted back to the originator, could very easily be known to the department having very long hand with full power. Thorough enquiry and deep investigations would have revealed the truth but unfortunately the department has railed to do so and, therefore, in our opinion the ITO was not authorised to treat the purchases as bogus without proper enquiry and investigation and without reaching the logical conclusion. Our view is supported by the decision of the ITAT, C-Bench, Calcutta in the case of Novel Project Ltd. (supra) on which reliance was placed by the learned counsel for the assessee. To appreciate the contention and argument the relevant portion of the decision is extracted as under :-
On careful consideration of the rival submissions in the light of the material on record, we see considerable merit in the contentions of the learned counsel of the assessee. As pointed out by him, it is not correct to say that the share brokers were not produced before the assessing officer. From the order of the assessing officer it is seen that Sri Manick Chand Choraria and Sri Bimal Kr. Ghosh appeared before the assessing officer. Sri R.C. Nandy was submitted to have expired by that time. There is, therefore, no chance for him to appear before the assessing officer. Even in the case of other share brokers the assessing officer would have issued summons and compelled attendance by them which has not been done. With regard to the adverse inference drawn by him on the statement given by the share brokers, we are of the view that such inference cannot be drawn in view of the fact that all the transactions were made in account payee cheques by the parties. Section 40A(3) has given statutory recognition of the type of transaction and payment by account payee cheque is treated as conclusive proof. In this case, there is no denial that Sri Bimal Kr. Ghosh received the payments in cheques and also made the payments by account payee cheques and the transactions have been made through his bank account. In the case of Sri Manick Chand Choraria though he retired from the business, there is no denial of the fact that other brokers are still carrying on the business in the name of Manick Chand Choraria and the transaction were done in the name of the said firm. In such a case it cannot be said that the transactions made in the name of Manick Chand Choraria are not genuine as other brokers are still carrying on business in the name of the said firm of Manick Chand Choraria. If the assessing officer has any doubt about the genuineness of the transactions, he should have exercised his power under Section 131 and compelled the attendance of other share brokers and also allow the assessee to cross-examine those brokes. Such actions have not been taken by the assessing officer. The Tribunal in the case of Usha Flowell Ltd. v. ITO ub UTA No. 1986 (Cal.) of 1989 of 19-5(88) considered similar transactions and it was held that the revenue could not dictate the mode in which the business of the assessee should have been conducted. Similarly, in the case of Suparswa Investments Ltd. v. ITO in ITA No. 531 (Cal.) of 1986 of 27-3-1987, the Tribunal Held that suspicion cannot take the place of proof and the transaction cannot be treated as bogus on mere suspicion. Similar view also has been taken in other cases of which are filed before us. Keeping in view the facts as narrated above, and also the ratio of the decision of other Benches of the Tribunal, we are of the view that mere suspicion will not be treated as sufficient proof for rejecting the transactions of the assessee as not genuine. Since the purchases have not been doubted, and since all the transactions have been undoubtedly made through account payee cheques and there being no proof of such payment reverting back to the originator, we have to hold that it was in the course of the normal business and the loss is deductible form the income of the year.
From the above decision of the Tribunal it is crystal clear that suspicion cannot take the place of proof and applying the same formula the instant case we find that the purchases cannot be treated as bogus on mere suspicion and surmises.
10. Then the finding of the Assessing Officer that sales-tax registration No. has nothing to do towards this end is also neither correct nor tenable. The sales-tax registration No. are printed on the bills. So it was the bounded duty of the ITO to enquire from the sales-tax department as to whether this sales-tax registration No. is allotted to non-existent person or existing one and whether the sales tax is collected and deposited with Govt. Exchequer or not and if yes by whom so on and so forth should have been enquired into in order to know the truth. Failure to do so on the part of the ITO indicates that his observations and findings in respect of sales-tax registration No. is not based on solid material and cogent evidence.
11. We find that the assessee has furnished all the details and particulars of purchase and sales item-wise, bill-wise, amount-wise, quantity-wise, date-wise, stock folio-wise and has established the linkage and correlation between the purchases and sales. The assessee has explained that goods were purchased materials were consumed and thereafter respective sales were effected but the ITO has rejected this contention only on the ground that as sellers were non-existent there could not have been purchases. We observe that the Assessing Officer has not analysed data and figures of production with reference to stock register and purchases, production and sales etc. in order to correlate the purchases and production on one hand and the sales and stock on the other. Whether such correlation and linkage existed between purchase and production on one hand and sales on the other is completely ignored by the ITO.
12. It is further noticed that the assumption that the assessee had concealed stock is not based on any material and evidence. According to the ITO's own formula, as all figures regarding opening stock, purchases, sales and closing stock of raw materials and finished goods are available in the audited accounts, the Assessing Officer should have calculated and arrived at exact concealed stock said to have been in the possession of the assessee but the Assessing Officer has failed to do so. We find that in this case opening stock of finished goods is Rs. 570 and closing stock is nil and the ITO has not disturbed them. Having once accepted such opening stock as closing stock in the assessment year 1989-90 and closing stock of nil as opening stock in subsequent assessment year i.e., 1991-92, the Revenue is not at liberty to estimate the stock again on presumption and surmises. In this view of the matter the presumption and assumption of concealed stock by the Assessing Officer is rejected. Probably this infirmity in the assessment order was very much in the knowledge of the CIT(A) and that is why while confirming the addition, he has not approved the theory of concealed stock adopted by the ITO. Although the CIT(A) has mentioned in his order about the bogus purchases in earlier years, he has deliberately avoided the concept of possession of concealed stock on the part of the assessee, as wrongly presumed by the Assessing Officer. Then we observe that the Assessing Officer has admitted that there were undisputed purchased and opening stock and the assessee could consume the same and could sell the goods. Referring to the audited accounts we find that after consuming the opening stock and purchases of raw materials of Rs. 71,473, the assessee has produced the finished goods at Rs. 1,92,352 and the opening stock of finished goods is shown at Rs. 570 and undisputed purchase of goods works out to Rs. 24,112 only (total purchases of Rs. 6,78,879 - disputed purchase of Rs. 6,54,767). If all the three figures i.e., opening stock of Rs. 570, production of Rs. 1,92,352 and undisputed purchase of Rs. 24,112 are totalled up they work out to Rs. 2,17,034 as against his sale of Rs. 10,95,180. Here also it is seen that without genuine purchases (as the theory of concealed stock is not accepted) no businessman can reach the target of sales of Rs. 10,95,180 by selling goods of Rs. 2,17,034 only. Here, the principles of presumption favours cause of the assessee and proves the existence of purchases which cannot be denied on the facts and circumstances of the case as the sales are effected to Govt. department.
13. The ITO's finding that how there could be documentary evidence when purchases are bogus is also not tanable as we find from pages 30 and 31 of the paper book of the assessee that the assessee has furnished the details and particulars of purchases and sales of finished goods datewise, billwise, namewise, itemwise, quantitywise, stock foliowise and amountwise and also Govt. order numberwise and the ITO has not pointed out any defects, irregularity and discrepancy in the statements and books of account, bills and vouchers, produced before him. These statements giving all relevant particulars and details are good pieces of evidence duly supported by books of account and unless and until they are controverted or their contents are disbelieved or disturbed by pointing out defects or by proving the defects with positive evidence, purchases cannot be declared to be bogus. Thus, we come to the conclusion on the basis of the above mentioned observations and findings that the ITO was not justified in declaring the purchases to be bogus for the reasons given by him.
14. From the operative part of the order of the CIT(A) as quoted above we find that his decision is based on one of the findings that the assessee did not co-operate with the Assessing Officer for examination of parties. We have examined this observation with reference to materials placed on the record and we find that the assessee has produced books of account and documents and has furnished all the details and particulars as mentioned above including the names, addresses, bills, sales-tax No. payment by account payee cheque so on and so forth and, therefore, the assessee has discharged his primary onus and has requested the Assessing Officer to issue summons under Section 131 to the persons after explaining his inability to produce them. Thus it is the department which failed to discharge its onus by not issuing and serving summons under Section 131 on the presumption that the parties are non-existent.
15. The observation of the CIT(A) that further issue of summons under Section 131 would have served no purpose can also not be accepted and is not tenable as summons under Section 131 to the managers of both the banks and to the sales-tax officer, examination of these officers on oath and further follow up and consequential enquiries and further issuance of summons etc. would have certainly revealed the correct fact on the basis of which the veracity of these transactions could have been verified. As this is not done and no follow up action is taken by the department to the logical end no adverse inference can be drawn against the assessee.
16. Then the finding of the CIT(A) that payment by account payee cheque and sales-tax registration No. cannot make non-existent parties as existent is also not correct and cannot be accepted firstly, because it is based on presumption before enquiry that parties are non-existent and secondly, it is nothing but distortion of two positive and cogent evidence without controverting them by producing sufficient evidence. Unless thorough enquiry and deep investigation is made from the bank and sales-tax department and logical conclusion is arrived at on the basis of such enquiry and investigation, no adverse inference can be drawn against the assessee.
17. We notice that the plea of the assessee about unreal gross profit of 82% is rejected by the CIT(A) as according to him the assessee might have shown bogus purchases in earlier years also which has been detected in the present assessment year. This finding of the CIT(A) cannot be accepted for want of evidence and proof and for the reasons that if the purchases were made in earlier years and now detected in this year, no addition can be made to the income of this year as purchases relate to earlier years. It is seen that the books of account are regularly maintained in this case and no defects have been pointed out by the ITO. It is also noticed that the turnover is also accepted by the ITO. Under these circumstances and on these facts the assessee's argument before the CIT(A) was that since the Assessing Officer has determined the gross profit of Rs. 8,98,216 on total turnover of Rs. 10,95,181 the resultant gross profit rate comes to 82% which is not only imaginary and unreal but is also fictitious in this line of business. We find a substantial force in this argument. Sri Tulsiyan, the learned counsel for the assessee has also repeatedly hammered on this point. We find that the assessment is finalised under Section 143(3) i.e., after scrutiny of the books of account and other documents. In spite of that this important aspect of margin of profit has been ignored by the ITO and has not been considered and decided properly and correctly by the CIT(A). In our opinion, therefore, the assessment made under Section 143(3) raising the gross profit rate abnormally high (a) 82% is pure guess work and is based on suspicion. Our view gets support from the Supreme Court decision in the case of Dhakeswari Cotton Mills Ltd. v. CIT [1954] 26 ITR 775. In this case the Supreme Court has observed at page 782 as under:
. . . it is equally clear that in making the assessment under Sub-section 3 of Section 143 of the Act, the Income-tax Officer is not entitled to make a pure guess and make an assessment without reference to any evidence or any material at all. There must be something more than mere suspicion to support the assessment under Section 143(3).
18. Our view is also supported by Bombay High Court decision in the case of R.B. Jessaram Fatehchand (Sugar Dept.)v. CIT [1970] 75 ITR 33 wherein it was held as under :-
In the case of a cash transaction where delivery of goods is taken against cash payment, it is hardly necessary for the seller to bother about the name and address of the purchaser. The account books of an assessee cannot therefore be rejected and an assessment made under Section 13 of the Income-tax Act, 1922, merely on the ground that the addresses of the assessees are not mentioned in the case of cash transactions.
In that case addresses of purchasers were not shown in the case of cash transactions and it was held that the failure to maintain the addresses and to supply them as and when called for cannot be regarded as a circumstance giving rise to a suspicion with regard to the genuineness of the transactions.
19. We have also noticed from the assessment order that the ITO is of deviating mind and is himself not sure of making well determined addition on account of bogus purchases. Firstly, he presumed the bogus purchases but when he is confronted with sales to Govt. department along with nexus with purchases, he switched over to the presumption of concealed stock. But again, when he found that on the basis of the actual facts and figures, he may not succeed in applying the theory of concealed stock, he jumped to the third presumption of inflated expenses and held as under:-
As such, the inflated expenses are not allowed. Hence, the same is added.
We have already examined and come to the conclusion in the foregoing paragraphs that on the facts and figures the presumption of possession of concealed stock and applicability of theory of concealed stock have completely failed and the Assessing Officer could not have taken recourse to either of two. Turning to the expenses, we find from the audited Manufacturing, Trading and Profit & Loss Account that all the expenses are charged to these accounts in a normal way and the Assessing Officer has not disturbed any one of them on the ground that they are inflated expenses. Therefore, his presumption is apparently wrong. Even if we presume (although not accept) that inflated expenses are in the shape of bogus purchases and concealed stock as presumed by the Assessing Officer is added to them and if the principles of accountancy are followed, fantastic and abnormal results, which cannot be believed, will be noticed.
20. Surprisingly, the CIT(A) at his stage has taken 4th stand that the assessee might have shown bogus purchases in earlier years, detected in -this year. Bogus purchases of earlier years cannot be added to the total income of this year. Yet, at the Tribunal stage the learned D.R. Sri R. Kumar has taken 5th stand and has submitted that these bogus purchases are nothing but cash credits and he has relied on the decision of the Calcutta High Court in the case of CIT v. Precision Finance (P.) Ltd. (supra) wherein it was held as under :-
It is for the assessee to prove the identity of the creditors, their creditworthiness and the genuineness of the transactions. Mere furnishing of the particulars is not enough. Mere payment by account payee cheque is not sacrosanct nor can it make a non-genuine transaction genuine.
The ratio of this decision is not applicable to the facts and circumstances of this case as the assessee has proved the identity of the suppliers by furnishing all the necessary particulars and documentary evidence. This decision is distinguishable as the purchases cannot be compared with cash credit at any stretch of imagination as the purchases in this case have corresponding sales to Govt. department.
In short, ratio of the Calcutta High Court decision is not applicable to this case because of following distinguishing features and facts noted by us:-
(i) In that case income-tax, file Nos. i.e., Permanent Account Nos. were given by the creditors but those files did not exist as per enquiry of the inspector but in the instant case the sales tax Nos. are given and no enquiry is made to declare them bogus.
(ii) In one of creditors' cases neither confirmatory letter nor full address was given while in the instant case bills with names and addresses were furnished in all seven cases.
(iii) In that case the ITO allowed opportunity for 7 1/2 years but those opportunities were not availed of by the assessee and nothing was produced. This is not the position in the present case.
(iv) In that case several letters were issued to the assessee for verification of credits. At no stage the assessee responded properly and no where the question of checking up the bank account was raised. While in the instant case the assessee has produced bank pass books of United Bank of India and State Bank of India and they were examined by the ITO with reference to account payee cheques issued to suppliers. Once the ITO examines the bank pass books and transactions noted therein and if he does not point out any defects in them rather he accepts the debit and credit entries of the bank pass book, the payment by account payee cheque becomes sacrosanct and genuine. Besides this, the assessee has furnished bank statements with account payee cheque Nos. and date along with purchase bills and has submitted that the Assessing Officer could have exercised his power under Section 13 to enforce attendance of bank authorities in order to verify the genuineness of the transaction and to know the present addresses. Although it is mentioned in para 5 of the order of the CIT(A), the CIT(A) rejected the submissions of the assessee and did not pay any heed to that.
(v) In view of the above facts in that case the identity was not proved while in the present case the primary onus was fully discharged by the assessee. Thus, we find that the Calcutta High Court decision in the case of Precision Finance (P.) Ltd. (supra) stands on the facts stated in that case and is not applicable to this case. In this way we find that the fifth stand taken by the department is absolutely wrong and cannot be accepted. Thus, the department is not firm and decisive in determining the nature and character of addition on account of so-called bogus purchases. It varies between five stands i.e., bogus purchases, concealed stock and inflated expenses on one hand and purchases of earlier years and cash credits on the other. All the stands are contrary to each other if they are put across. The department has failed to reconcile them at any stage. Such deviating stands are not only contrary to the facts of the case but are also contrary to the provisions of law and, therefore, cannot be accepted and recognised in the eyes of law and they cannot stand the test of judicial scrutiny and factual analysis and examination.
21. The burden of establishing mala fides is very heavy on person who alleges it. Normally the very serious nature of the allegation demands a credible proof of high order in support of such allegations, more so when the purchases are linked with sales to Govt. department. The Revenue has completely failed to discharge this heavy burden of proving and establishing mala fides on the part of the assessee, by producing cogent, positive and credible evidence of high order in support of bogus purchases. In our opinion, only inspector's report and four envelops containing summons returned by the Post Office with remarks "not known" on the basis of which allegation is made cannot be said to be credible evidence and proofs of high order. The assessee has challenged even the service of summons under Section 131 contained in four envelops returned with remarks, "not known" on the ground that postal remarks "not known" and "not found" have different meanings and connotations. Sri S.K. Tulsiyan the learned counsel for the assessee has relied on Kerala High Court's decision in the case of K.R. Venkitaperumal Raja wherein it was held as under :-
If the registered letter is received back through the post office stating that it could not be delivered to the addressee or the addressee was dead when the letter was taken, the presumption stands rebutted. Similarly, in cases where the notice is returned by the post office with an endorsement that the registered letter could not be delivered since the addressee could not be found or was not available, the presumption afforded by Section 64(1)(c) regarding due service of notice will not be available.
22. This simply means that the summons were not even duly served on four suppliers and, therefore, these envelopes could not be used as material evidence. The assessee's contention that such materials cannot be used as admissible evidence as neither these envelopes were shown to him nor certified copies were granted to him in spite of repeated requests, can also not be ignored. In our opinion, therefore, these four envelopes are not relevant and proper material which can be used as piece of evidence and on the basis of which such drastic decision should have been taken by the department. This view of ours is supported by the Supreme Court decision in the case of Kishinchand Chellaram v. CIT [1980] 125 ITR 713. The Supreme Court has observed at page 720 as under:-
But before the I.T. authorities could rely upon it, they were bound to produce it before the assessee so that the assessee could controvert the statement contained in it.
23. We have already discussed in the foregoing paragraphs that the ITO's order is based only on inspector's report and the Assessing Officer has failed to established the correlation and linkage between the conclusions of bogus purchases and the primary facts upon which that conclusion is based. Accordingly, such conclusion arrived at and based on extraneous and irrelevant material cannot be accepted according to the proposition of law laid down by the Supreme Court in the case of CIT v. Daulat Ram Rawatmull [l973] 87 ITR 349. The observation of the Supreme Court at page 362 is extracted as under:-
There should, in our opinion, be some direct nexus between the conclusion of fact arrived at by the authority concerned and the primary facts upon which that conclusion is based. The use of extreneous and irrelevant material in arriving at that conclusion would vitiate the conclusion of fact because it is difficult to predicate as to what extent the extreneous and irrelevant material has influenced the authority in arriving at. the conclusion of fact.
24. We also take note of the fact that the contention of the assessee that some unscrupulous business organisations used to change the name and style of their existing business organisations in Calcutta as it is known to the department has been completely brushed aside by the Assessing Officer and the CIT(A) for the reasons best known to them. It is observed and noticed from the assessee's letter dated 22-2-1993 addressed to ITO, Ward 4(11), Calcutta that, while expressing his inability to produce the suppliers and while requesting the ITO to issue summons under Section 131, the assessee has stated as under:-
. . . the purchases were undertaken through his representatives and/ or middleman/broker. It is a common practice here in Calcutta that some unscrupulour business organisations used to change the name and style of their existing business concern after the end of the financial year, this is also known to your honour.
25. The Revenue is absolutely silent on this matter. The Assessing Officer and the CIT(A) have not touched this vital point of issue at all and the inspector had no courage to report the real facts. He did not take the risk of burning his finger by reporting the correct facts about the clandestine business going on in Howrah area of Calcutta. In this view of the matter we are, therefore, of the opinion that the department was not justified in making the addition on account of purchases by keeping the sparking truth revealing the correct fact behind a dark curtain, by concealing the i acts and by not bringing relevant material and evidence on record. If this fact was irrelevant and untrue it should have been rebutted, controverted and. rejected altogether by the department. Since this has not been done and as no efforts have been made by the departmental authorities to know the present address of suppliers, no adverse inference can be drawn against the assessee.
26. We find that the assessee has given names and addresses of the suppliers and has furnished all particulars and details of purchases. The assessee has also produced books of account and pass books and has furnished copies of bills, account payee cheque Nos. and sales-tax Nos. etc. Although it was in the knowledge of IT department that suppliers are assessed to sales tax no follow-up action was taken. It was also in the knowledge of the department that payments are made by account payee cheques and bank names, pass book Nos. and cheque Nos. were given but in spite of that the Revenue did not conduct thorough enquiry and investigation and did not pursue the matter further. There is no effort to find out the present addresses of suppliers. On the facts and in the circumstances of the case, the assessee could not do anything further except requesting the Revenue to issue summons to suppliers. We therefore come to the conclusion that the assessee has discharged the burden and it is the Revenue being alleging party which failed to discharge the heavy burden of establishing mala fides by producing evidence and proof of high order. We accordingly arrive at the conclusion that on the facts and in the circumstances of the case the addition made by the Assessing Officer and confirmed by the CIT(A) is not in accordance with law and our conclusion is based on relevant material, cogent and positive evidence produced and furnished by the assessee. Our view is squarely covered and supported by the Supreme Court decision in the case of CIT v. Orissa Corporation (P.) Ltd. [1986] 159 ITR 78 wherein it was held as under :-
In this case the respondent had given the names and addresses of the alleged creditors. It was in the knowledge of the Revenue that the said creditors were income-tax assessees. Their index numbers were in the file of the Revenue. The Revenue, apart from issuing notices under Section 131 at the instance of the respondent, did not pursue the matter further. The Revenue did not examine the source of income of the said alleged creditors to find out whether they were creditworthy. There was no effort made to pursue the so-called alleged creditors. In those circumstances, the respondent could not do anything further. In the premises, if the Tribunal came to the conclusion that the respondent had discharged the burden that lay on it, then it could not be said that such a conclusion was unreasonable or perverse or based on no evidence.
27. In this view of the matter as well as for the reasons mentioned in the foregoing paragraphs we hold that on the facts and in the circumstances of the case, the CIT (Appeal) was not justified in confirming the addition of Rs. 6,54,767 on account of bogus purchases made by the Income-tax Officer. Accordingly we quash the orders of the ITO and the CIT (Appeal) and delete the addition. This ground of appeal, therefore, succeeds.
28 to 30. These paras are not reproduced here as they involve minor issues.