TMI Blog1995 (5) TMI 51X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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. Venkitaperumal Raja v. CIT [1992] 193 ITR 213 at pp. 218 219. It was further pointed out tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not 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., a copy of which has been filed along with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essing 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, m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 niland 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 nilas 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 infirmit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is 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 @ 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 Fate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 [1973] 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 n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xcept-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 Corpn. (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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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