J.H. Metals Vs. Income-tax Officer - Court Judgment

Excerpt:
1. per s. grover, judicial member - this second appeal is directed against the order dated 18-1-1989 passed by the commissioner of income-tax (appeals), jalandhar, hereinafter referred as the cit(a), in respect of assessment year 1986-87, by which firstly he upheld the ito's action of adding rs. 1,08,510 in the assessment on the ground that purchases made from one shri khazanchi lal, kabaria were bogus and secondly, he upheld the abovcsaid addition also on the ground that expenditure incurred for the purchases was in violation of section 40a(3) of the income-tax act, 1961, hereinafter referred as ihe act.2. the assessee is a dealer in metals and the account books were supported by purchase and sale vouchers. in the matter of purchases, scrap was purchased sometimes from kabarias, who did not issue any sale bills but the assessee recorded purchases from them by making internal vouchers.3. return was submitted showing income of rs. 81,050 and the assessment was framed under section 143(1) of the act on 31-12-1986. later on, the case was taken up for scrutiny under section 143(2) (b) of the act.4. total purchase during the year amounted to rs. 18,09,812.86. though there was opening stock of rs. 1,56,965,60, the closing block was only of rs. 7,062.49. this fact is considered important because of the profit rale in the year under appeal as also in respect of earlier and the later assessment years. the following graphical chart would show that hut lor the year under appeal and thy assessment year 1988-89, the trading results have been accepted though assessments in respect of assessment years 1990-91 and 1991-92 have come to be framed under section 143(3) of the act :-- 5. during the course of assessment proceedings explaining the purchases from kabarias, the assessee produced shri khazanchi lal, who confirmed the factum of purchases as well as the payments received in cash. the ito rejected shri khazanchi lal's evidence on the grounds listed in the assessment order, which are discussed as under :-- (i) as per the assessing officer prior to filing of the affidavit of shri khazanchi lal, the assessee had claimed the purchases lor which purchase bills were not available from kabarias. by filing the affidavit of shri khazanchi lal now the stand taken is that cash purchases had been made only from kabaria i.e., shri khazanchi lal. this is factually incorrect as in the body ol the order itself, the ito had discussed about the purchases from another kabaria shri inderjit singh. thus it is a case of purchase from two kabarias. (ii) another objection of the ito was that the kabaria (khazanchi lal) had done this work from 1985 and upto 1986 only and not before or thereafter. it is not understood as to what adverse inference could be drawn from such fact as the assessee was only concerned with the purchases made from him during that period. he had clearly explained that he had started working as polisher of sports goods thereafter. (iii) the ito has doubted his statement on the ground that he was not a man of means as he could not possibly have rs. 5,000 as his investment in the said business. this was only a conjecture. it is well known that in the present day situation rs. 5,000 is only a small amount and even a worker could have saving to that extent. at any rale it was not understandable as to why the ito did not ask this question to shri khazanchi lal when he cross-examined him on so many issues. a copy of affidavit of shri khazanchi lal and copy of his examination by the ito have been given to us and arc at pages 15, 16 & 17 or the the asscssee's ledger book. (iv) the objection of the ito that shri khazanchi lal did not remember total sales made to the assessec, was irrelevant and of no consequence as no one possibly could remember such a thing, especially when he was not maintaining any record. (v) the ito had tried to challenge the affidavit of shri khazanchi lal on the ground that although he admitted to have signed the same, he was unable to tell the contents thereof. firstly this was factually incorrect as perusal of the statement showed that shri khazanchi lal had duly confirmed his signatures and as well as its contents. secondly the ito had not relied on the affidavit alone and had required the presence of shri khazanchi lal who was produced before him. the statement of shri khazanchi lal and his cross-examination were duly recorded by the ito and nothing was found contrary to what had been stated in the affidavit. he had clearly explained that since he believed m/s. j.h. metals and since he had been making sales of scrap to them, he had verified the sales made to them. (vi) the ito's objection that shri khazanchi lal was not aware about the rates, was factually incorrect. the particular voucher, which has been referred to by the ito clearly showed that the rate was rs. 50.50 per kg. the figure of 162 was in fact the weight and not line rate.6. the ito took an alternative ground about the addition of rs. 90,735 out of total addition of rs. 1,08,510 could be justified on the ground that the same was hit by section 40a(3) of the act, read with rule 6dd of the income-tax rules, 1962. he rejected the contention of the assessee that the payments had been made at the insistence of kabarias, ie., scrap dealers on the ground that identity of the seller was not disclosed. the ito's posture cannot be justified because affidavit of shri khazanchi lal was clear on the point and the assessing officer had not chosen to cross-examine shri khazanchi lal on such issue at all.thus even the identity of seller stood proved, who not only filed an affidavit but was also produced before the assessing officer.7. the ito having made addition, ihc assessec came up in appeal before the cit(a) and contested the impugned addition on both the counts stated supra. the cit(a) not only upheld the addition on account o( alleged bogus purchases but surprisingly confirmed the same with the help of section 40a(3) of the act also when the ito's approach in that regard was different and he was attacking only purchases of rs. 90,735.from para 2,3 of the cit(a)'s order, we notice that addition was sought to be made under section 40a(3) of the act even in relation to items purchased and payments made in cash which were less than rs. 2,500. to complete the picture, it would be expedient to notice and reproduce the relevant para 2 of the cit(a)'s order as follows :-- "2. the first seven grounds of appeal are with regard to addition disallowance of rs. 1,08,510 under section 40a(3) of the act. 2.1 the ld. ito has made an addition of rs. 1,08,510 on the ground that the appellant-firm had made purchases which are not genuine and; at the same time those are in violation of section 40a(3) of the act. shri sud stated that the appellant-firm was a dealer in metals and the books of account were duly supported by purchase and sale vouchers. however, sometimes the scrap is purchased from the kabarias who do not have any stationery for issue of the sale bills. the a pp ell an i-firm, therefore, makes purchases from them by making internal vouchers only. during the course of assessment proceedings the appellant-firm had produced shri khazanchi lal from whom the purchases to the extent of rs. 1,08,510 were made. according to shri sud, it is not understood as to what inference could be drawn from the fact that shri khazanchi lal kabaria has been doing business since assessment year 1985-86 only. the ld. ito was concerned only with the purchases made in the accounting year relevant to the assessment year under appeal. according to him, the ld. ito was not justified in doubting the statement of shri khazanchi lal regarding the purchases and was, again, not justified in holding that shri khazanchi lal could not possibly sell the goods as he had started the business with a meagre investment of rs. 5,000 only. shri khazanchi lal had further explained that he could make a higher sales by taking two strips in a day or so. if a reference is made to the statement and the cross-examination of shri khazanchi lal it is apparent that the id. ito did not doubt this aspect at the lime of cross-examining shri khazanchi lal. the id. ito lias tried to challenge the affidavit of shri khazanchi lal on the ground that although he has admitted to have signed the same he was unable to tell the contents thereof. according to shri sud, this observation is factually incorrect as a perusal of the statement would show that shri khazanchi lal has confirmed the signatures as well as the contents of the affidavit. according to him, the ito's objection that sh. khazanchi lal was not aware about the rates was factually incorrect. in a particular voucher, which had been referred to by the ld. ito, a rate of rs. 50.50ps. per kg. is shown whereas the figure of 162 is actually the weight and not the rate. according to shri sud, if the purchases are held to be bogus it would make very unrealistic trading results which would not be comparable with any other dealer in metal scrap. according to him, the purchases of rs. 1,08,510 had been made under exceptional circumstances and, therefore, the benefit of rule 6dd of the income-tax rules, 1962 should be made available to the appellant-firm. 2.2 in my view, the addition of rs. 1,08,510 will not lead to any unrealistic trading results. the appellant-firm had shown the gross profit of rs. 1,24,758 on a turnover of rs. 20,84,474. even if the addition of rs. 1,08,510 is made the gross profit would increase to rs. 2,32,000 and the g.p. rate would be about 11.596 which is not unrealistic at all especially when the dealer/appellant-firm had been allegedly making purchases from the kabarias. therefore, i am unable to subscribe to the view that the finding that the purchases of rs. 1,08,510 were bogus would produce unrealistic results. 2.3 the particulars of the sales as given in the affidavit are reproduced herebelow:-- 2.4 from the above particulars, it is noticed that the amount of purchases had exceeded on a number of occasions, rs. 5,000. say, for instance, the purchase as on 26-94985 was for rs. 6,765 and again of rs. 6,232 on 27-9-1985, rs. 5,084 on 28-9-1985 and rs. 3,080 on 28-9-1985. it means that kabaria had sold the goods of more than rs. 20,000 in just four days. such a person would hardly be treated as a kabaria. if his volume of business had been at such a level he would have definitely maintained some business premises. he might have employed one or two or more persons to collect the scrap from a number of places and bring it to a particular place. it is not possible to believe the version of the appellant-firm that the kabaria might be undertaking two visits in a day to purchase the scrap and then sell the same to the appellant-firm. the volume of the business would show that the seller of the goods must be having some regular business premises. some employees and also adequate financial resources. in the present case, shri khazanchi lal is stated to be serving as a polisher of sports goods on a daily wages of rs. 25 to rs. 30. he also did not have any experience in this line since he is stated to have started the business just about the same time when the purchases are stated to have been made. he also did not have adequate means to finance these transactions as he must have first paid for the purchases. in my view, taking all the circumstances together in a cumulative manner an impression is created that the purchases of rs. 1,08,510 arc not genuine. 2.5 regarding the applicability of section 40a(3) of the act and rule 6dd of the income-tax rules, 1962, the board has laid down certain guidelines to ensure the uniformity of approach with regard to the circumstances in which the conditions laid down in rule 6dd(j) would he applicable. the conditions are as follows :-- (ii) the transactions are made at a place where either the purchaser or the seller does not have a bank account; or (iv) the seller is refusing to accept the payment by way of crossed cheque/draft and the purchaser's business interest would suffer due to non-availability of the goods otherwise than from this particular seller; or (v) the seller acting as a commission agent is required to pay cash in turn to persons from whom he has purchased the goods; (vi) specific discount is given to the seller for payment to be made in cash. it has further been laid down in the circular that the assessee would produce evidence to the satisfaction of the ito regarding the genuineness of the transaction and the identity of the payee. 2.6 for the purpose of getting the benefits of the board's guidelines it is necessary that the assessee should produce evidence to the satisfaction of the assessing officer regarding the genuineness of the transaction. for applying section 40a(3) it is not necessary at all for the assessing officer to prove that the purchases are bogus. if the assessing officer could lead sufficient evidence to doubt the genuineness of the purchases the assessee would not be entitled to the benefit of rule 6dd. in the present case, though, in my view there is evidence to indicate that the purchases are not genuine but in any case it is sufficient to hold that there is a serious doubt about the genuineness of the purchases. in these circumstances, i hold that the appellant-firm is not entitled to the benefit of rule 6dd and therefore the expenditure incurred for the purchases is in violation of section 40a(3) of the act. in these circumstances, the disallowance of rs. 1,08,510 is sustained and this ground of appeal is rejected.' 8. in view of the discussion in relation to the assessment order, which was made the basis of the cit(a)'s decision and considering the contents of the affidavits and that the ito did not even choose to cross-examine shri khazanchi lal in relation to averments regarding insistence for cash payments when he was examined regarding his transaction with the assessee, in our considered view, addition was not justified and should have been deleted by the cit(a) on both the counts. we accordingly vacate the addition.9. this leaves us with ground no, 4 in which disallowance of rs. 1,500 on account of salary paid to smt. usha rani is contested.10. the ito made addition on the ground that the lady being related to the partners of the firm, the onus was heavy on the assessee to prove the legitimacy of claim. before the cit(a), a positive assertion was made that she was not related and the salary was paid to her only for five months. this has in terms been noticed by the learned cit(a) in para 5 of his order. therefore, holding that the basis of the addition in the first place was wrong, we vacate the disallowance of rs. 1,500 also.per r.k. bali, accountant member - 12. i have perused the order passed by my learned senior colleague, the j.m., but i am not able to agree with his finding with regard to the deletion or addition of rs. 1,08,510 made by the assessing officer as confirmed by the learned first appellate authority on account of bogus purchases allegedly made from one sh. khazanchi lal kabaria.13. the factual aspect of the case has been narrated in paras 5, 6 & 7 of the order passed by my learned brother, the j.m., and after considering the order of the learned first appellate authority, as reproduced in para 7 of his order, my learned colleague came to the conclusion that the addition of rs. 1,08,510 is not justified.14. to appreciate the controversy, it will be worthwhile to reproduce the affidavit of sh. khazanchi lal kabaria as furnished at page 15 of the paper book filed by the assessee and his examination by the assessee and cross-examination by the assessing officer on 23-3-1988 as given in pages 16 & 17 of the paper book of the assessee :-- i, khazanchi lal s/o shri sardari lal, resident of 18, shiv nagar, sodal road, jalandhar city do hereby solemnly declare and affirm as under:-- 1. that at present i am working as a polisher of sports goods in basti nau, jalandhar city and my daily wages are rs. 25 to rs. 30. 2. that prior to this polish work i was doing pheri business in the sale of brass rod/brass sheet, copper strip, tin solder, lead etc. 3. that i had been selling the above items to m/s. j.h. metals, bikrampura, jalandhar city. 4. that during the financial year 1-4-1985 to 31-3-1986 i had sold brass rod/brass sheet, copper strip and tin solder lead to m/s. j.h. metals, bikrampura, jalandhar city as per the following details:-- 5. that i insisted the above party to pay me in cash against the goods sold to them as i do not have any bank a/c in my own name. i khazanchi lal s/o shri sardari lal do hereby declare whatsoever stated above is true to the best of my knowledge and belief and no part there is false. "statement of sh. kha/.anchi lal s/o shri sardari lal, aged above 38 years, resident of 12, shiv nagar, sodal road, indl. area, jalandhar recorded on 23-3-1988 s.s. that i am polisher of sports goods. i am doing this work on daily wages of rs. 25 to rs. 30 per day with shri sardari lal my father. i am putting up separately from my father. i am doing the work of a polisher for the last about 1 1/2 years. prior to that i was doing the work of pheriwala. is used to purchase old copper cutting, brass sheet cutting, brass rod cutting and sikka. the work of phcriwata was carried out for a period of one year and four months. prior to the work of pheriwala, i was doing the work of a turner because i am holder of diploma as turner. i was employed with m/s. bhim engg. works as a turner for about 2 years. i do not remember the period. the job of a turner was also sometimes done on daily wages @ rs. 20 per day. m/s. bhirn engg. works used to pay rs. 300 or so per month. i do not maintain any bank a/c. the work of pheriwala was undertaken sometimes in 1985-86 calendar years. i did not maintain any a/c of sale/purchase of brass scrap etc. i do not own any immovable property. i have no deposits anywhere. i was married in 1973. i have 3 children. the scrap used to be purchased from mistries doing motor mechanic works. i had no place to store the strap. i used to sell on that very day on which the purchase was made. ans. m/s. j.h. metals, bikrampura; (ii) m/s. indo metal, sodal road, (iii) m/s. vikas metal. q. please tell the rate and name of the specific raw material sold by you to m/s. j.h. metal:-- i used to sell 15 kg. to 20 kg. per day and both the sale consideration in cash. q. for what amount the scrap was sold by you per day? please name the highest figure? q. please indicate the total sales of scrap made by you to m/s. j.h. metal in particular and others in general ans. i sold the scrap in 1985-86 financial year to various parties as under:-- q. please name the parties from whom you purchased goods and the value of which purchased? m/s. azad electrical kapurthala -i do not remember the value of the goods purchased. i used to purchase goods in cash. local purchases was not made. i do not remember the name of any party of jalandhar from whom purchase of scrap might have been made. q. from whom you managed the funds for purchase of scrap and its transportation expenses and mode of transport ans. i had about rs. 5,000 with me. i used to carry on the business with that money. i used to carry the goods by bus under my supervision. ans. i used to purchase 25 to 30 kg. in a single strip. more could not be handled as i had to carry the scrap myself upto bus stand or on a rickshaw. q. i show you an affidavit dated 17-3-1988 which bears your signatures. do you confirm your signatures on its and its contents. ans. i confirm the signatures on it as mine. as regards contents thereof, it is stated that the affidavit was got signed from me by shri v.k. bahri of m/s. j.h. metals. i had sold the scrap to them. they have mentioned the sale by me. since i believe them as such i have confirmed the contents. i have no records with me. q, the contents of the affidavit reveals that the sale of scrap by you ranges from rs. 93 to rs. 6,765 in a day. some of the bigger instances are given below :-- will you please explain how you could sell scrap to the above extent, when your purchase was not to the extent and more so there was no stocks with you ans. i used to make two trips on certain days and as a result of this i could afford to affect sale to the above extent. ans. i acquit myself with the technique from a friend. recorded by me ro & ac sd/-(r.l. gupta) ito sd/- khazanchi lal 23-3-1988 23-3-1988 15. from the above it is clear that although no date has been given on the affidavit, as furnished at page 15 of the paper book furnished by the assessee, it is dated 17-3-1988, which is clear from the cross-examination of sh. khazanchi lal kabaria on 23-3-1988 by the assessing officer. in para 4 of the affidavit the entire sales allegedly made by sh. khazanchi lal kabaria are mentioned datewise and he has confirmed the sales of brass rod/brass sheet, copper scrap, copper strips, tin solder etc. although he has admitted in his statement that he was not maintaining any books of account. during cross-examination he admitted that the contents in the affidavit were got signed from him by sh. v.k. bahri of m/s. j.h. metals and since he believed them he has confirmed the contents of the affidavit but he has no record with him.16. a perusal of the statement of sh. khazanchi lal kabaria, recorded on 23-3-1988 by the assessee in the presence of the assessing officer indicates that he was working on daily wages at rs. 25 to rs. 30 per day with his father sh. sardari lal as a polisher of sports goods. in the statement he has stated that prior to his working as a polisher he was working as a pheriwala and he used to purchase old copper cuttings, brass sheet cutting, brass rod cuttings and sikka and he has worked as a pheriwala for a period of one year four months only. prior to this working, it has been claimed by sh. khazanchi lal kabaria, that he was working as a turner on daily wages at rs. 20 per day. thus it is seen that prior to his working as a kabaria or even after he ceased to work as a kabaria, for the assessment year under consideration sh. khazanchi lal, as per his admission, was earning rs. 20 to rs. 30 per day. in the statement, in answer to 1st question, he has admitted having sold goods worth rs. 900 to rs. 1,200 to the assessee, which consisted of scraps in the form of brass rod cuttings, copper strips, brass sheets and the rate varied from rs. 45 to rs. 60 per kg.17. a perusal of the affidavit indicated that on 26-9-1986, sh.khazanchi lal has claimed to have sold goods to the assessee amounting to rs. 6,765 and in terms of weight and quantity this will be more than 100 kgs. similarly on 27-9-1985 the goods claimed to be sold were valued at rs. 6,232 and on 28-9-1986 it was rs. 8,164. thus on these 3 days the actual sale of scrap will be more than 100 kgs. and on 28-9-1985 it may be more than 150 kgs. during the course of examination sh. khazanchi lal stated before the assessing officer that he has been doing this pheri business by purchasing the goods in cash from parties at kapurthala or mandi gobindgarh and nor from jalandhar. he has stated that he used to carry the scrap himself upto the bus stand and if the weight was more then in a rickshaw. in this view of the matter, it will be almost impossible to believe that he had carried scrap more than 100 kgs. by bus from mandi gobindgarh or kapurthala to jalandhar and sold them on the same day as admittedly sh. khazanchi lal was not having any place of business or place for the storage of scrap. his assertion that he could have sold scrap of more than 100 kgs. on the same day by making two trips does not inspire confidence. even, otherwise he has admitted that he had started this business with an initial capital/investment of rs. 5,000 only and a person with an initial investment of rs. 5,000 could not purchase goods in cash every day ranging from rs. 6,232 to rs. 8,164 as is the case on 3 dates ie., 26th, 27th & 28th september, 1985. admittedly sh. khazanchi lal is neither assessed to income-tax nor to sales-tax; he does not have any bank account, he does not have any books of account nor any regular vouchers for the sales made by him and the only basis for which my learned brother, the jm, has ordered the deletion or the addition is that sh. khazanchi lal has admitted having sold scraps to the assessee although that statement is not corroborated by any evidence. it is worthwhile to mention that initially in the grounds of appeal taken before the learned first appellate authority the assessee has challenged the addition of rs. 1,08,510 on account of purchases made from sh. khazanchi lal kabaria and another addition of rs. 11,500 being the goods purchased from sh. inderjeet singh--another kabaria. however, at the time of hearing before the learned first appellate authority, when the assessee was asked to prove the genuineness of these purchases, he could not produce sh. inderjeet singh and the learned first appellate authority confirmed the disallowance of rs. 11,500 treating this amount as bogus purchase and the assessee has chosen not to contest this in second appeal before the tribunal.18. in this view of the matter, it becomes important that although initially before the assessing officer, the claim was made that the assessee has been purchasing goods from kabarias, the fact remains that the assessee has disputed the addition made only in relation to the purchases from sh. khazanchi lal kabaria and has accepted that the purchases made from sh. inderjeet singh, the other kabaria were bogus as these were not challenged in second appeal.19. it is also pertinent to note that although sh. khazanchi lal, kabaria claimed to have worked as a pheriwala and has claimed the sale of goods to the assessee m/s. j.h. metals as well as m/s. indo-metals and vikas metals, he was unable to give any details regarding the sales made to the other two parlies namely m/s. indo metals, sodal road and m/s. vikas metals. thus, it appears that sh. khazanchi lal has filed the affidavit as well as given a statement only to accommodate the assessee for reducing its profits by making a claim for bogus purchases amounting to rs. 1,08,510 as these purchases are not supported by any documentary evidence and the statement of sh. khazanchi lal kabaria, does not inspire any confidence.20. in this connection, it will be useful to refer to the observations of the hon'ble supreme court of india in the case of citv. durga prasad more [1971] 82 itr 540 at page 541 wherein their lordships have observed as under:-- "... that though an apparent statement must be considered real until it was shown that there were reasons to believe that the apparent was not the real, in a case where a party relied on self-serving recitals in documents, it was for that party to establish the truth of those recitals; the taxing authorities were entitled to look into the surrounding circumstances to find out the reality of such recitals." 21. therefore, for the reasons given by the learned assessing officer as well as the learned first appellate authority, i will hold that the departmental authorities were justified in making/confirming the addition of rs. 1,08,510 on account of bogus purchases.22. as regards other dispute relating to applicability of section 40a(3) to these purchases, i am in agreement with my learned brother, the jm, that the provisions of section 40a(3) are not applicable to all the purchases as admittedly some of them are less than rs. 2,500 and keeping in view the nature of transactions, if the purchases are held to be genuine, then the payment in cash would be covered by the exceptions envisaged under rule 6dd(j). however, since i am upholding the addition on account of bogus nature of purchases, i will hold that provisions of section 40a(3) are not applicable.23. coming to the dispute regarding disallowance of rs. 1,500 on account of salary paid to smt. usha rani, i am in agreement with my learned brother, the jm, that the departmental authorities were not justified in making the disallowance as the salary paid to smt. ushn rani was for a period of 5 months only and the lady is not related to any of the partners of the assessee firm.there being difference of opinion between the two members, who heard the appeal in i.t.a. no. 463(asr)/1989, the following point of difference is framed for reference to the president of the income-tax appellate tribunal under section 255(4) of the income-tax act, 1961 :-- "whether the judicial member has been right in holding that addition of rs. 1,08,510 should be vacated or the view taken by the accountant member that the departmental authorities were justified in making the said addition can be said to be correct ?" per shri v. dongzathang, president -the following point of difference was referred to me for decision under section 255(4) of the income-tax act, 1961 : "whether, the judicial member has been right in holding that addition of rs. 1,08,510 should be vacated or the view taken by the accountant member that the departmental authorities were justified in making the said addition can be said to be correct ?" 2. the assessee is a dealer in metals and the account books were supported by purchase and sale vouchers. in the matter of purchases, scrap was purchased sometimes from kabarias, who did not issue any sale bills but the assessee recorded purchases from them by making internal vouchers. total purchase during the year amounted to rs. 18,09,812.86.though there was opening stock of rs. 1,56,965.60, the closing stock was only rs. 7,062.49. the assessing officer examined the details of these purchases and rejected the claim of purchase of these items from kabarias for the reasons fully reproduced by the learned judicial member in the order at para 5. the assessing. officer also took alternative ground for addition of rs. 90,735 out of the total addition of rs. 1,08,510 under section 40a(3) of the act. thus the assessing officer made an addition of rs. 1,08,510 as cash purchases treated as bogus.3. aggrieved by the said order, the assessee took up the matter in appeal before the cit(appeals) who upheld the order not only on account of alleged bogus purchases but on the basis of the provisions of section 40a(3) of the act also.4. still aggrieved, the assessee came up in appeal before the tribunal.the learned judicial member was of the view that the order of the cit(appeals) cannot be sustained in view of the fact that the assessing officer did not even care to cross-examine shri khazanchi lal kabaria who sold the brass rod/brass sheet, copper strip and tin solder lead etc. to the assessee. shri khazanchi lal also stated that he insisted on cash payments for the sales made to the assessee. in such a case, the addition should have been deleted by the clt(appeals).5. on the other hand, the learned accountant member fully examined the details including the affidavit filed by shri khazanchi lal and came to the conclusion that the assessing officer as well as the learned first appellate authority were justified in making and confirming the addition of rs. 1,08,510 on account of bogus purchases. the learned accountant member, however, agreed with the learned judicial member in regard to non-applicability of section 40a(3) to these purchases.6. on this difference of opinion, the question extracted above was referred to me. at the hearing shri jarawar singh, learned counsel appeared for the assessee and shri s.c. pahwa, leaned sr. d.r. appeared for the revenue. they were heard at length.7. on careful consideration of the rival submissions in the light of the material on record, i am of the view that no addition is called for in this regard. firstly, there is no doubt about the source of money used for the purchase of these goods. the assessing officer also did not dispute the fact that this alleged bogus purchased formed part of the stock of the assessee which was disposed of during the year. if the investment in the purchase of these items is not doubted and the items purchased were included in the turnover, the only issue that remains for consideration is in regard to the rale of profit. the assessee tabulated the rate of profit from assessment years 1985-86 to 1991-92 as reproduced in the order of the learned judicial member. the rale of g.p. ranges from 5.6 to 6.7 during these assessment years. the assessee during the year disclosed a g.p. rate of 6%. the same appears to be reasonable in view of the prevailing rate of profit from year to year as the turnover during the year is two times of assessment year 1985-86 where the rate of profit was 5.9. it is also seen that in the assessment year 1988-89, the assessing officer made addition of rs. 27,694 011 account of unvouched purchases. when the matter came up to the tribunal, the tribunal (wherein the learned accountant member himself is the author) found that the g.p. rate of 6.7% on sale of rs. 50,74,569 as compared to 5.2% shown on total sales of rs. 43,70,724 in the case of the assessee in the immediately preceding assessment year is quite reasonable and no addition was called for. it is also seen that the assessing officer himself accepted g.p. rate of 5.896 for assessment year 1991 -92. in that view of the matter also, there is no reason for making any addition. i, therefore, concur with the view taken by the learned judicial member.8. the matter will now go back to the division bench for passing consequential order.

Judgment:
1. Per S. Grover, Judicial Member - This second appeal is directed against the order dated 18-1-1989 passed by the Commissioner of Income-tax (Appeals), Jalandhar, hereinafter referred as the CIT(A), in respect of assessment year 1986-87, by which firstly he upheld the ITO's action of adding Rs. 1,08,510 in the assessment on the ground that purchases made from one Shri Khazanchi Lal, Kabaria were bogus and secondly, he upheld the abovcsaid addition also on the ground that expenditure incurred for the purchases was in violation of section 40A(3) of the Income-tax Act, 1961, hereinafter referred as Ihe Act.

2. The assessee is a dealer in metals and the account books were supported by purchase and sale vouchers. In the matter of purchases, scrap was purchased sometimes from Kabarias, who did not issue any sale bills but the assessee recorded purchases from them by making internal vouchers.

3. Return was submitted showing income of Rs. 81,050 and the assessment was framed under section 143(1) of the Act on 31-12-1986. Later on, the case was taken up for scrutiny under section 143(2) (b) of the Act.

4. Total purchase during the year amounted to Rs. 18,09,812.86. Though there was opening stock of Rs. 1,56,965,60, the closing block was only of Rs. 7,062.49. This fact is considered important because of the profit rale in the year under appeal as also in respect of earlier and the later assessment years. The following graphical chart would show that hut lor the year under appeal and thy assessment year 1988-89, the trading results have been accepted though assessments in respect of assessment years 1990-91 and 1991-92 have come to be framed under section 143(3) of the Act :-- 5. During the course of assessment proceedings explaining the purchases from Kabarias, the assessee produced Shri Khazanchi Lal, who confirmed the factum of purchases as well as the payments received in cash. The ITO rejected Shri Khazanchi Lal's evidence on the grounds listed in the assessment order, which are discussed as under :-- (i) As per the Assessing Officer prior to filing of the affidavit of Shri Khazanchi Lal, the assessee had claimed the purchases lor which purchase bills were not available from Kabarias. By filing the affidavit of Shri Khazanchi Lal now the stand taken is that cash purchases had been made only from Kabaria i.e., Shri Khazanchi Lal.

This is factually incorrect as in the body ol the order itself, the ITO had discussed about the purchases from another Kabaria Shri Inderjit Singh. Thus it is a case of purchase from two Kabarias.

(ii) Another objection of the ITO was that the Kabaria (Khazanchi Lal) had done this work from 1985 and upto 1986 only and not before or thereafter. It is not understood as to what adverse inference could be drawn from such fact as the assessee was only concerned with the purchases made from him during that period. He had clearly explained that he had started working as polisher of sports goods thereafter.

(iii) The ITO has doubted his statement on the ground that he was not a man of means as he could not possibly have Rs. 5,000 as his investment in the said business. This was only a conjecture. It is well known that in the present day situation Rs. 5,000 is only a small amount and even a worker could have saving to that extent. At any rale it was not understandable as to why the ITO did not ask this question to Shri Khazanchi Lal when he cross-examined him on so many issues. A copy of affidavit of Shri Khazanchi Lal and copy of his examination by the ITO have been given to us and arc at pages 15, 16 & 17 or the the asscssee's ledger book.

(iv) The objection of the ITO that Shri Khazanchi Lal did not remember total sales made to the assessec, was irrelevant and of no consequence as no one possibly could remember such a thing, especially when he was not maintaining any record.

(v) The ITO had tried to challenge the affidavit of Shri Khazanchi Lal on the ground that although he admitted to have signed the same, he was unable to tell the contents thereof. Firstly this was factually incorrect as perusal of the statement showed that Shri Khazanchi Lal had duly confirmed his signatures and as well as its contents. Secondly the ITO had not relied on the affidavit alone and had required the presence of Shri Khazanchi Lal who was produced before him. The statement of Shri Khazanchi Lal and his cross-examination were duly recorded by the ITO and nothing was found contrary to what had been stated in the affidavit. He had clearly explained that since he believed M/s. J.H. Metals and since he had been making sales of scrap to them, he had verified the sales made to them.

(vi) The ITO's objection that Shri Khazanchi Lal was not aware about the rates, was factually incorrect. The particular voucher, which has been referred to by the ITO clearly showed that the rate was Rs. 50.50 per kg. The figure of 162 was in fact the weight and not line rate.

6. The ITO took an alternative ground about the addition of Rs. 90,735 out of total addition of Rs. 1,08,510 could be justified on the ground that the same was hit by section 40A(3) of the Act, read with Rule 6DD of the Income-tax Rules, 1962. He rejected the contention of the assessee that the payments had been made at the insistence of Kabarias, ie., Scrap Dealers on the ground that identity of the seller was not disclosed. The ITO's posture cannot be justified because affidavit of Shri Khazanchi Lal was clear on the point and the Assessing Officer had not chosen to cross-examine Shri Khazanchi Lal on such issue at all.

Thus even the identity of seller stood proved, who not only filed an affidavit but was also produced before the Assessing Officer.

7. The ITO having made addition, ihc assessec came up in appeal before the CIT(A) and contested the impugned addition on both the counts stated supra. The CIT(A) not only upheld the addition on account o( alleged bogus purchases but surprisingly confirmed the same with the help of section 40A(3) of the Act also when the ITO's approach in that regard was different and he was attacking only purchases of Rs. 90,735.

From para 2,3 of the CIT(A)'s order, we notice that addition was sought to be made under section 40A(3) of the Act even in relation to items purchased and payments made in cash which were less than Rs. 2,500. To complete the picture, it would be expedient to notice and reproduce the relevant para 2 of the CIT(A)'s order as follows :-- "2. The first seven grounds of appeal are with regard to addition disallowance of Rs. 1,08,510 under section 40A(3) of the Act.

2.1 The ld. ITO has made an addition of Rs. 1,08,510 on the ground that the appellant-firm had made purchases which are not genuine and; at the same time those are in violation of section 40A(3) of the Act. Shri Sud stated that the appellant-firm was a dealer in metals and the books of account were duly supported by purchase and sale vouchers. However, sometimes the scrap is purchased from the Kabarias who do not have any stationery for issue of the sale bills.

The a pp ell an I-firm, therefore, makes purchases from them by making internal vouchers only. During the course of assessment proceedings the appellant-firm had produced Shri Khazanchi Lal from whom the purchases to the extent of Rs. 1,08,510 were made.

According to Shri Sud, it is not understood as to what inference could be drawn from the fact that Shri Khazanchi Lal Kabaria has been doing business since assessment year 1985-86 only. The ld. ITO was concerned only with the purchases made in the accounting year relevant to the assessment year under appeal. According to him, the ld. ITO was not justified in doubting the statement of Shri Khazanchi Lal regarding the purchases and was, again, not justified in holding that Shri Khazanchi Lal could not possibly sell the goods as he had started the business with a meagre investment of Rs. 5,000 only. Shri Khazanchi Lal had further explained that he could make a higher sales by taking two strips in a day or so. If a reference is made to the statement and the cross-examination of Shri Khazanchi Lal it is apparent that the Id. ITO did not doubt this aspect at the lime of cross-examining Shri Khazanchi Lal. The Id. ITO lias tried to challenge the affidavit of Shri Khazanchi Lal on the ground that although he has admitted to have signed the same he was unable to tell the contents thereof. According to Shri Sud, this observation is factually incorrect as a perusal of the statement would show that Shri Khazanchi Lal has confirmed the signatures as well as the contents of the affidavit. According to him, the ITO's objection that Sh. Khazanchi Lal was not aware about the rates was factually incorrect. In a particular voucher, which had been referred to by the ld. ITO, a rate of Rs. 50.50ps. per Kg. is shown whereas the figure of 162 is actually the weight and not the rate. According to Shri Sud, if the purchases are held to be bogus it would make very unrealistic trading results which would not be comparable with any other dealer in metal scrap. According to him, the purchases of Rs. 1,08,510 had been made under exceptional circumstances and, therefore, the benefit of Rule 6DD of the Income-tax Rules, 1962 should be made available to the appellant-firm.

2.2 In my view, the addition of Rs. 1,08,510 will not lead to any unrealistic trading results. The appellant-firm had shown the gross profit of Rs. 1,24,758 on a turnover of Rs. 20,84,474. Even if the addition of Rs. 1,08,510 is made the gross profit would increase to Rs. 2,32,000 and the g.p. rate would be about 11.596 which is not unrealistic at all especially when the dealer/appellant-firm had been allegedly making purchases from the Kabarias. Therefore, I am unable to subscribe to the view that the finding that the purchases of Rs. 1,08,510 were bogus would produce unrealistic results.

2.3 The particulars of the sales as given in the affidavit are reproduced herebelow:-- 2.4 From the above particulars, it is noticed that the amount of purchases had exceeded on a number of occasions, Rs. 5,000. Say, for instance, the purchase as on 26-94985 was for Rs. 6,765 and again of Rs. 6,232 on 27-9-1985, Rs. 5,084 on 28-9-1985 and Rs. 3,080 on 28-9-1985. It means that Kabaria had sold the goods of more than Rs. 20,000 in just four days. Such a person would hardly be treated as a Kabaria. If his volume of business had been at such a level he would have definitely maintained some business premises. He might have employed one or two or more persons to collect the scrap from a number of places and bring it to a particular place. It is not possible to believe the version of the appellant-firm that the Kabaria might be undertaking two visits in a day to purchase the scrap and then sell the same to the appellant-firm. The volume of the business would show that the seller of the goods must be having some regular business premises. Some employees and also adequate financial resources. In the present case, Shri Khazanchi Lal is stated to be serving as a polisher of sports goods on a daily wages of Rs. 25 to Rs. 30. He also did not have any experience in this line since he is stated to have started the business just about the same time when the purchases are stated to have been made. He also did not have adequate means to finance these transactions as he must have first paid for the purchases. In my view, taking all the circumstances together in a cumulative manner an impression is created that the purchases of Rs. 1,08,510 arc not genuine.

2.5 Regarding the applicability of section 40A(3) of the Act and Rule 6DD of the Income-tax Rules, 1962, the Board has laid down certain guidelines to ensure the uniformity of approach with regard to the circumstances in which the conditions laid down in Rule 6DD(j) would he applicable. The conditions are as follows :-- (ii) the transactions are made at a place where either the purchaser or the seller does not have a bank account; or (iv) the seller is refusing to accept the payment by way of crossed cheque/draft and the purchaser's business interest would suffer due to non-availability of the goods otherwise than from this particular seller; or (v) the seller acting as a commission agent is required to pay cash in turn to persons from whom he has purchased the goods; (vi) specific discount is given to the seller for payment to be made in cash.

It has further been laid down in the circular that the assessee would produce evidence to the satisfaction of the ITO regarding the genuineness of the transaction and the identity of the payee.

2.6 For the purpose of getting the benefits of the Board's guidelines it is necessary that the assessee should produce evidence to the satisfaction of the Assessing Officer regarding the genuineness of the transaction. For applying section 40A(3) it is not necessary at all for the Assessing Officer to prove that the purchases are bogus. If the Assessing Officer could lead sufficient evidence to doubt the genuineness of the purchases the assessee would not be entitled to the benefit of Rule 6DD. In the present case, though, in my view there is evidence to indicate that the purchases are not genuine but in any case it is sufficient to hold that there is a serious doubt about the genuineness of the purchases. In these circumstances, I hold that the appellant-firm is not entitled to the benefit of Rule 6DD and therefore the expenditure incurred for the purchases is in violation of section 40A(3) of the Act. In these circumstances, the disallowance of Rs. 1,08,510 is sustained and this ground of appeal is rejected.' 8. In view of the discussion in relation to the assessment order, which was made the basis of the CIT(A)'s decision and considering the contents of the affidavits and that the ITO did not even choose to cross-examine Shri Khazanchi Lal in relation to averments regarding insistence for cash payments when he was examined regarding his transaction with the assessee, in our considered view, addition was not justified and should have been deleted by the CIT(A) on both the counts. We accordingly vacate the addition.

9. This leaves us with ground No, 4 in which disallowance of Rs. 1,500 on account of salary paid to Smt. Usha Rani is contested.

10. The ITO made addition on the ground that the lady being related to the partners of the firm, the onus was heavy on the assessee to prove the legitimacy of claim. Before the CIT(A), a positive assertion was made that she was not related and the salary was paid to her only for five months. This has in terms been noticed by the learned CIT(A) in para 5 of his order. Therefore, holding that the basis of the addition in the first place was wrong, we vacate the disallowance of Rs. 1,500 also.

Per R.K. Bali, Accountant Member - 12. I have perused the order passed by my learned Senior Colleague, the J.M., but I am not able to agree with his finding with regard to the deletion or addition of Rs. 1,08,510 made by the Assessing Officer as confirmed by the learned first Appellate Authority on account of bogus purchases allegedly made from one Sh. Khazanchi Lal Kabaria.

13. The factual aspect of the case has been narrated in paras 5, 6 & 7 of the order passed by my learned brother, the J.M., and after considering the order of the learned first Appellate Authority, as reproduced in para 7 of his order, my learned colleague came to the conclusion that the addition of Rs. 1,08,510 is not justified.

14. To appreciate the controversy, it will be worthwhile to reproduce the affidavit of Sh. Khazanchi Lal Kabaria as furnished at page 15 of the Paper Book filed by the assessee and his examination by the assessee and cross-examination by the Assessing Officer on 23-3-1988 as given in pages 16 & 17 of the Paper Book of the assessee :-- I, Khazanchi Lal S/o Shri Sardari Lal, resident of 18, Shiv Nagar, Sodal Road, Jalandhar City do hereby solemnly declare and affirm as under:-- 1. That at present I am working as a polisher of Sports Goods in Basti Nau, Jalandhar City and my daily wages are Rs. 25 to Rs. 30.

2. That prior to this polish work I was doing pheri business in the sale of Brass Rod/Brass Sheet, Copper Strip, Tin Solder, Lead etc.

3. That I had been selling the above items to M/s. J.H. Metals, Bikrampura, Jalandhar City.

4. That during the financial year 1-4-1985 to 31-3-1986 I had sold Brass Rod/Brass Sheet, Copper Strip and Tin Solder Lead to M/s. J.H. Metals, Bikrampura, Jalandhar City as per the following details:-- 5. That I insisted the above party to pay me in cash against the goods sold to them as I do not have any bank a/c in my own name.

I Khazanchi Lal S/o Shri Sardari Lal do hereby declare whatsoever stated above is true to the best of my knowledge and belief and no part there is false.

"Statement of Sh. Kha/.anchi Lal S/o Shri Sardari Lal, aged above 38 years, resident of 12, Shiv Nagar, Sodal Road, Indl. Area, Jalandhar recorded on 23-3-1988 S.S. that I am polisher of sports goods. I am doing this work on daily wages of Rs. 25 to Rs. 30 per day with Shri Sardari Lal my father. I am putting up separately from my father. I am doing the work of a polisher for the last about 1 1/2 years. Prior to that I was doing the work of Pheriwala. Is used to purchase old copper cutting, brass sheet cutting, brass rod cutting and sikka. The work of phcriwata was carried out for a period of one year and four months. Prior to the work of Pheriwala, I was doing the work of a turner because I am holder of diploma as turner. I was employed with M/s. Bhim Engg. Works as a turner for about 2 years. I do not remember the period. The job of a turner was also sometimes done on daily wages @ Rs. 20 per day. M/s. Bhirn Engg. Works used to pay Rs. 300 or so per month. I do not maintain any bank a/c. The work of pheriwala was undertaken sometimes in 1985-86 calendar years. I did not maintain any a/c of sale/purchase of brass scrap etc. I do not own any immovable property. I have no deposits anywhere. I was married in 1973. I have 3 children. The scrap used to be purchased from mistries doing motor mechanic works. I had no place to store the strap. I used to sell on that very day on which the purchase was made.

Ans. M/s. J.H. Metals, Bikrampura; (ii) M/s. Indo Metal, Sodal Road, (iii) M/s. Vikas Metal.

Q. Please tell the rate and name of the specific raw material sold by you to M/s. J.H. Metal:-- I used to sell 15 kg. to 20 kg. per day and both the sale consideration in cash.

Q. For what amount the scrap was sold by you per day? Please name the highest figure? Q. Please indicate the total sales of scrap made by you to M/s. J.H. Metal in particular and others in general Ans. I sold the scrap in 1985-86 financial year to various parties as under:-- Q. Please name the parties from whom you purchased goods and the value of which purchased? M/s. Azad Electrical Kapurthala -I do not remember the value of the goods purchased.

I used to purchase goods in cash. Local purchases was not made. I do not remember the name of any party of Jalandhar from whom purchase of scrap might have been made.

Q. From whom you managed the funds for purchase of scrap and its transportation expenses and mode of transport Ans. I had about Rs. 5,000 with me. I used to carry on the business with that money. I used to carry the goods by bus under my supervision.

Ans. I used to purchase 25 to 30 kg. in a single strip. More could not be handled as I had to carry the scrap myself upto Bus Stand or on a rickshaw.

Q. I show you an affidavit dated 17-3-1988 which bears your signatures. Do you confirm your signatures on its and its contents.

Ans. I confirm the signatures on it as mine. As regards contents thereof, it is stated that the affidavit was got signed from me by Shri V.K. Bahri of M/s. J.H. Metals. I had sold the scrap to them.

They have mentioned the sale by me. Since I believe them as such I have confirmed the contents. I have no records with me.

Q, The contents of the affidavit reveals that the sale of scrap by you ranges from Rs. 93 to Rs. 6,765 in a day. Some of the bigger instances are given below :-- Will you please explain how you could sell scrap to the above extent, when your purchase was not to the extent and more so there was no stocks with you Ans. I used to make two trips on certain days and as a result of this I could afford to affect sale to the above extent.

Ans. I acquit myself with the technique from a friend. Recorded by me RO & Ac Sd/-(R.L. Gupta) ITO Sd/- Khazanchi Lal 23-3-1988 23-3-1988 15. From the above it is clear that although no date has been given on the affidavit, as furnished at page 15 of the Paper Book furnished by the assessee, it is dated 17-3-1988, which is clear from the cross-examination of Sh. Khazanchi Lal Kabaria on 23-3-1988 by the Assessing Officer. In para 4 of the Affidavit the entire sales allegedly made by Sh. Khazanchi Lal Kabaria are mentioned datewise and he has confirmed the sales of Brass Rod/Brass Sheet, Copper Scrap, Copper Strips, Tin Solder etc. although he has admitted in his statement that he was not maintaining any books of account. During cross-examination he admitted that the contents in the Affidavit were got signed from him by Sh. V.K. Bahri of M/s. J.H. Metals and since he believed them he has confirmed the contents of the affidavit but he has no record with him.

16. A perusal of the statement of Sh. Khazanchi Lal Kabaria, recorded on 23-3-1988 by the assessee in the presence of the Assessing Officer indicates that he was working on daily wages at Rs. 25 to Rs. 30 per day with his father Sh. Sardari Lal as a Polisher of Sports Goods. In the statement he has stated that prior to his working as a Polisher he was working as a pheriwala and he used to purchase old copper cuttings, brass sheet cutting, brass rod cuttings and Sikka and he has worked as a pheriwala for a period of one year four months only. Prior to this working, it has been claimed by Sh. Khazanchi Lal Kabaria, that he was working as a turner on daily wages at Rs. 20 per day. Thus it is seen that prior to his working as a Kabaria or even after he ceased to work as a Kabaria, for the assessment year under consideration Sh. Khazanchi Lal, as per his admission, was earning Rs. 20 to Rs. 30 per day. In the statement, in answer to 1st Question, he has admitted having sold goods worth Rs. 900 to Rs. 1,200 to the assessee, which consisted of scraps in the form of Brass rod cuttings, copper strips, brass sheets and the rate varied from Rs. 45 to Rs. 60 per kg.

17. A perusal of the Affidavit indicated that on 26-9-1986, Sh.

Khazanchi Lal has claimed to have sold goods to the assessee amounting to Rs. 6,765 and in terms of weight and quantity this will be more than 100 kgs. Similarly on 27-9-1985 the goods claimed to be sold were valued at Rs. 6,232 and on 28-9-1986 it was Rs. 8,164. Thus on these 3 days the actual sale of scrap will be more than 100 kgs. and on 28-9-1985 it may be more than 150 kgs. During the course of examination Sh. Khazanchi Lal stated before the Assessing Officer that he has been doing this Pheri business by purchasing the goods in cash from parties at Kapurthala or Mandi Gobindgarh and nor from Jalandhar. He has stated that he used to carry the scrap himself upto the Bus Stand and if the weight was more then in a Rickshaw. In this view of the matter, it will be almost impossible to believe that he had carried scrap more than 100 kgs. by Bus from Mandi Gobindgarh or Kapurthala to Jalandhar and sold them on the same day as admittedly Sh. Khazanchi Lal was not having any place of business or place for the storage of scrap. His assertion that he could have sold scrap of more than 100 kgs. on the same day by making two trips does not inspire confidence. Even, otherwise he has admitted that he had started this business with an initial capital/investment of Rs. 5,000 only and a person with an initial investment of Rs. 5,000 could not purchase goods in cash every day ranging from Rs. 6,232 to Rs. 8,164 as is the case on 3 dates ie., 26th, 27th & 28th September, 1985. Admittedly Sh. Khazanchi Lal is neither assessed to income-tax nor to sales-tax; he does not have any bank account, he does not have any books of account nor any regular vouchers for the sales made by him and the only basis for which my learned brother, the JM, has ordered the deletion or the addition is that Sh. Khazanchi Lal has admitted having sold scraps to the assessee although that statement is not corroborated by any evidence. It is worthwhile to mention that initially in the grounds of appeal taken before the learned first Appellate Authority the assessee has challenged the addition of Rs. 1,08,510 on account of purchases made from Sh. Khazanchi Lal Kabaria and another addition of Rs. 11,500 being the goods purchased from Sh. Inderjeet Singh--another Kabaria. However, at the time of hearing before the learned first Appellate Authority, when the assessee was asked to prove the genuineness of these purchases, he could not produce Sh. Inderjeet Singh and the learned first Appellate Authority confirmed the disallowance of Rs. 11,500 treating this amount as bogus purchase and the assessee has chosen not to contest this in second appeal before the Tribunal.

18. In this view of the matter, it becomes important that although initially before the Assessing Officer, the claim was made that the assessee has been purchasing goods from Kabarias, the fact remains that the assessee has disputed the addition made only in relation to the purchases from Sh. Khazanchi Lal Kabaria and has accepted that the purchases made from Sh. Inderjeet Singh, the other Kabaria were bogus as these were not challenged in second appeal.

19. It is also pertinent to note that although Sh. Khazanchi Lal, Kabaria claimed to have worked as a pheriwala and has claimed the sale of goods to the assessee M/s. J.H. Metals as well as M/s. Indo-Metals and Vikas Metals, he was unable to give any details regarding the sales made to the other two parlies namely M/s. Indo Metals, Sodal Road and M/s. Vikas Metals. Thus, it appears that Sh. Khazanchi Lal has filed the Affidavit as well as given a statement only to accommodate the assessee for reducing its profits by making a claim for bogus purchases amounting to Rs. 1,08,510 as these purchases are not supported by any documentary evidence and the statement of Sh. Khazanchi Lal Kabaria, does not inspire any confidence.

20. In this connection, it will be useful to refer to the observations of the Hon'ble Supreme Court of India in the case of CITv. Durga Prasad More [1971] 82 ITR 540 at page 541 wherein their Lordships have observed as under:-- "... that though an apparent statement must be considered real until it was shown that there were reasons to believe that the apparent was not the real, in a case where a party relied on self-serving recitals in documents, it was for that party to establish the truth of those recitals; the taxing authorities were entitled to look into the surrounding circumstances to find out the reality of such recitals." 21. Therefore, for the reasons given by the learned Assessing Officer as well as the learned first Appellate Authority, I will hold that the departmental authorities were justified in making/confirming the addition of Rs. 1,08,510 on account of bogus purchases.

22. As regards other dispute relating to applicability of section 40A(3) to these purchases, I am in agreement with my learned brother, the JM, that the provisions of section 40A(3) are not applicable to all the purchases as admittedly some of them are less than Rs. 2,500 and keeping in view the nature of transactions, if the purchases are held to be genuine, then the payment in cash would be covered by the exceptions envisaged under Rule 6DD(j). However, since I am upholding the addition on account of bogus nature of purchases, I will hold that provisions of section 40A(3) are not applicable.

23. Coming to the dispute regarding disallowance of Rs. 1,500 on account of salary paid to Smt. Usha Rani, I am in agreement with my learned brother, the JM, that the departmental authorities were not justified in making the disallowance as the salary paid to Smt. Ushn Rani was for a period of 5 months only and the lady is not related to any of the partners of the assessee firm.

There being difference of opinion between the two Members, who heard the appeal in I.T.A. No. 463(ASR)/1989, the following point of difference is framed for reference to the President of the Income-tax Appellate Tribunal under section 255(4) of the Income-tax Act, 1961 :-- "Whether the Judicial Member has been right in holding that addition of Rs. 1,08,510 should be vacated or the view taken by the Accountant Member that the Departmental Authorities were justified in making the said addition can be said to be correct ?" Per Shri V. Dongzathang, President -The following point of difference was referred to me for decision under section 255(4) of the Income-tax Act, 1961 : "Whether, the Judicial Member has been right in holding that addition of Rs. 1,08,510 should be vacated or the view taken by the Accountant Member that the Departmental Authorities were justified in making the said addition can be said to be correct ?" 2. The assessee is a dealer in metals and the account books were supported by purchase and sale vouchers. In the matter of purchases, scrap was purchased sometimes from Kabarias, who did not issue any sale bills but the assessee recorded purchases from them by making internal vouchers. Total purchase during the year amounted to Rs. 18,09,812.86.

Though there was opening stock of Rs. 1,56,965.60, the closing stock was only Rs. 7,062.49. The Assessing Officer examined the details of these purchases and rejected the claim of purchase of these items from Kabarias for the reasons fully reproduced by the learned Judicial Member in the order at para 5. The Assessing. Officer also took alternative ground for addition of Rs. 90,735 out of the total addition of Rs. 1,08,510 under section 40A(3) of the Act. Thus the Assessing Officer made an addition of Rs. 1,08,510 as cash purchases treated as bogus.

3. Aggrieved by the said order, the assessee took up the matter in appeal before the CIT(Appeals) who upheld the order not only on account of alleged bogus purchases but on the basis of the provisions of section 40A(3) of the Act also.

4. Still aggrieved, the assessee came up in appeal before the Tribunal.

The learned Judicial Member was of the view that the order of the CIT(Appeals) cannot be sustained in view of the fact that the Assessing Officer did not even care to cross-examine Shri Khazanchi Lal Kabaria who sold the brass rod/brass sheet, copper strip and tin solder lead etc. to the assessee. Shri Khazanchi Lal also stated that he insisted on cash payments for the sales made to the assessee. In such a case, the addition should have been deleted by the ClT(Appeals).

5. On the other hand, the learned Accountant Member fully examined the details including the affidavit filed by Shri Khazanchi Lal and came to the conclusion that the Assessing Officer as well as the learned First Appellate Authority were justified in making and confirming the addition of Rs. 1,08,510 on account of bogus purchases. The learned Accountant Member, however, agreed with the learned Judicial Member in regard to non-applicability of section 40A(3) to these purchases.

6. On this difference of opinion, the question extracted above was referred to me. At the hearing Shri Jarawar Singh, learned counsel appeared for the assessee and Shri S.C. Pahwa, leaned Sr. D.R. appeared for the revenue. They were heard at length.

7. On careful consideration of the rival submissions in the light of the material on record, I am of the view that no addition is called for in this regard. Firstly, there is no doubt about the source of money used for the purchase of these goods. The Assessing Officer also did not dispute the fact that this alleged bogus purchased formed part of the stock of the assessee which was disposed of during the year. If the investment in the purchase of these items is not doubted and the items purchased were included in the turnover, the only issue that remains for consideration is in regard to the rale of profit. The assessee tabulated the rate of profit from assessment years 1985-86 to 1991-92 as reproduced in the order of the learned Judicial Member. The rale of G.P. ranges from 5.6 to 6.7 during these assessment years. The assessee during the year disclosed a g.p. rate of 6%. The same appears to be reasonable in view of the prevailing rate of profit from year to year as the turnover during the year is two times of assessment year 1985-86 where the rate of profit was 5.9. It is also seen that in the assessment year 1988-89, the Assessing Officer made addition of Rs. 27,694 011 account of unvouched purchases. When the matter came up to the Tribunal, the Tribunal (wherein the learned Accountant Member himself is the author) found that the g.p. rate of 6.7% on sale of Rs. 50,74,569 as compared to 5.2% shown on total sales of Rs. 43,70,724 in the case of the assessee in the immediately preceding assessment year is quite reasonable and no addition was called for. It is also seen that the Assessing Officer himself accepted g.p. rate of 5.896 for assessment year 1991 -92. In that view of the matter also, there is no reason for making any addition. I, therefore, concur with the view taken by the learned Judicial Member.

8. The matter will now go back to the Division Bench for passing consequential order.