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income-tax Officer Vs. Madhoram Bhagwandas - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Jaipur
Decided On
Judge
Reported in(1985)12ITD608(JP.)
Appellantincome-tax Officer
RespondentMadhoram Bhagwandas
Excerpt:
1. the revenue and the assessee are in appeal against the order of the commissioner (appeals) dated 15-10-1982, and as the appeals are against the same order, the same are being disposed of by means of this common order.2. the revenue's grievance is that the commissioner (appeals) has erred in deleting the addition of rs. 79,753 made by the ito as income from undisclosed sources.2.1 the assessee's appeal is that the learned commissioner (appeals) has erred on facts and in law in sustaining the addition of rs. 79,753 for alleged contravention of section 40a(3) of the income-tax act, 1961 ('the act') in the present case and that it is totally misconceived, contrary to the facts and without any material and in no case the same can be said to be covered by the provision contained in section.....
Judgment:
1. The revenue and the assessee are in appeal against the order of the Commissioner (Appeals) dated 15-10-1982, and as the appeals are against the same order, the same are being disposed of by means of this common order.

2. The revenue's grievance is that the Commissioner (Appeals) has erred in deleting the addition of Rs. 79,753 made by the ITO as income from undisclosed sources.

2.1 The assessee's appeal is that the learned Commissioner (Appeals) has erred on facts and in law in sustaining the addition of Rs. 79,753 for alleged contravention of Section 40A(3) of the Income-tax Act, 1961 ('the Act') in the present case and that it is totally misconceived, contrary to the facts and without any material and in no case the same can be said to be covered by the provision contained in Section 40A(3).

3. The brief facts, as observed by the ITO are as under : The original assessment was finalised on 6-12-1979 on a total income of Rs. 1,16,096. This total income included an addition made of Rs. 79,753 on account of bogus purchases from Jitender Kumar Vinod Kumar of Delhi after holding that the assessee had not made any purchases from this party and it was the unaccounted stock of the assessee which was introduced as purchases in the name of the party. Against this order of the ITO, the Commissioner (Appeals) confirmed the addition made by the ITO. The assessee preferred appeal to the Tribunal, who, vide their order dated 12-9-1980, considered various facts and set aside the assessment and restored the same to the file of the ITO to consider the additional evidence and to pass a fresh order providing the assessee an opportunity in the matter before reframing the assessment. The directions of the Tribunal also contained that the ITO should look into the point raised by the assessee, that the stock against the purchases made from the Delhi party are duly reflected in the trading account as well as the stock register of the assessee and the effect of such availability of stock with the assessee. The present assessment dated 10-8-1981 is in pursuance of the above direction of the Tribunal.

3.1 The ITO, consequent to the direction of the Tribunal, considered the additional evidence in respect of the statement of Shri Om Prakash Joshi given before the ADI (Int.), Jaipur, on 11-2-1976.

3.2 The brief facts in regard to Rs. 79,753 are as under. The assessee-firm deals in iron scrap goods. In the year the assessee had shown purchases from five parties, one of whom was Jitender Kumar Vinod Kumar. The details of purchases so made are :11-1-1975 12,393.0013-1-1975 12,301.2014-1-1975 12,266.9328-2-1975 42,791,65 79,752.78 The address of the party was given as Loha Mandi, Motia Khan, New Delhi. The assessee was asked to produce the supplier several times but the assessee contended that this was the solitary transaction with this party. It was also explained that this party was introduced by one of the employees and that the assessee had never known this party personally earlier and as such he was unable to produce this party. The copies of bills issued by Jitender Kumar Vinod Kumar were produced before the ITO for his verification. The ITO, on verification of these bills, was of the view that the said carbon copies did not appear to have been issued from a regular bill book as they did not bear printed numbers and that the numbers were typed, but all the same they were purported to have been signed by Jitender Kumar. It was also observed that the payments of these bills were made by the assessee as under : Rs.28- 6-1975 By Cash 1,252.7822-12-1975 By account payee cheque 10,000.0023-12-1975 By account payee cheque 20,000.0026-12-1975 By account payee cheque 30,000.0026-12-1975 By account payee cheque 18,500.00 79,752.78 The ITO required the assessee to produce the receipts of transport company, namely, Krishan Gopal Rajasthan Transport Co., Naya Bazar, Delhi, and the registered letter which was sent to this transport company returned unserved with remarks that no such party existed on the above address. Shri Vinod Kumar, the partner of the assessee-firm, was asked to produce the employee through whom the party was introduced to him to which reply given was that the employee was Shri Joshi who is no longer in service of the assessee-firm and his address is not known to the firm. The ITO, however, noted that Shri Joshi appeared before the ITO and made a statement before the ADI, Jaipur, on 11-2-1976. The statement as recorded by the ADI, reproduced by the ITO in his order, is as under: I was in the employment of the above two concerns at Ajmer for about three years. The last pay drawn by me was Rs. 365 plus free boarding and lodging. I was relieved from the service by both these concerns on 30th December, 1975. My duties were that of general type. I was not dealing with account of either of these two concerns. The immediate cause of my being relieved from service was the resentment that I showed against the illegal act in which Madhoram Bhagwandas had involved me. The facts concerning this illegal act were as under : (i) Madhoram Bhagwandas has accumulated certain unaccounted stocks of iron and steel. These unaccounted stocks were put through by them in the books of account near about in January 1975 at a value of about Rs. 80,000. The corresponding credit for the sum of Rs. 80,000 was given to Jitender Kumar Vinod Kumar of Delhi. The credit so given to the account of Jitender Kumar Vinod Kumar of Delhi was allowed to stand for about a year. Then in December 1975, one current account in the name of Jitender Kumar Vinod Kumar was opened with the New Bank of India, near Railway station, Ajmer, and one Gopinath was shown as a proprietor of the concern. In the account opening form of this concern, I was made to sign as Gopinath, proprietor, with a cash deposit of Rs. 100. On the day the account was opened, a cheque book was taken from the bank and I was made to sign 7 or 8 cheques in blank. On the back of each of these cheques, I also signed as Gopinath at two places. After having taken these blank but signed cheques from me, Madhoram Bhagwandas issued the following crossed cheques on their account in favour of Jitender Kumar Vinod Kumar.1st cheque was of 10,0002nd cheque was of 20,0003rd cheque was of 30,0004th cheque was of 18,500 The above cheques were paid into the account of Jitender Kumar Vinod Kumar.

One paying-in-slip for one of these cheques was filled in by me. The paying-in-slip for other cheques were got filled by Madhoram Bhagwandas from some other person, of whom I have no knowledge.

(ii) The cheques got issued in blank from me on the day the account was opened, were utilised by Madhoram Bhagwandas for withdrawing the proceeds of their cheques going into the account of Jitender Kumar Vinod Kumar. I also remember that on 29-12-1975, one blank cheque was got filled in by Madhoram Bhagwandas from me. That way all the money deposited by them in the account of Jitender Kumar Vinod Kumar was withdrawn by them through the cheques taken in blank from me.

(iii) It was on 29th December, 1975, that I realised the gravity of the situation in which I had lent myself in signing as Gopinath in the account opening form of Jitender Kumar Vinod Kumar. When I expressed my fears to my employers in this behalf, they immediately called upon me to tender my resignation, which I had to do, and relieved me on 30th December, 1975, by paying me two months' salary and gratuity.

I am giving the above information lest Madhoram Bhagwandas and Bansiwala Iron & Steel Rolling Mills may try to involve me in some way or the other.

Now I am taking the opportunity of disclosing how these two concerns have evaded the excise duty. Madhoram Bhagwandas had been purchasing ingots from NBC, Jaipur, through their agent Universal Trading Co.

Ltd., Jaipur. All these ingots were sold to Bansiwala Iron & Steel Rolling Mills, but in the sale memos it was seldom that ingots were shown as sold. Generally, the material shown as sold was re-rolling material. This was to avoid excise duty of Rs. 130 per ton on the sale of ingots to an iron and steel rolling mills. That way Madhoram Bhagwandas must have avoided excise duty of about Rs. 70,000 to Rs. 80,000 during my stay.

Shri Joshi was cross-examined by the assessee's counsel on 29-4-1981 and Shri Joshi reiterated that there exists no firm by the name of Jitender Kumar Vinod Kumar and that the purchases shown in its name were bogus. Shri Joshi further emphatically stated that the payments in the name of Jitender Kumar Vinod Kumar were bogus and that he was made to sign on the blank cheques, Shri Joshi further emphasised that according to him the purchases stocks was lying with the assessee which was unaccounted and the same was introduced as purchases from this party. Shri Joshi also deposed and admitted that he had opened the account with the New Bank of India signing as Gopinath and this was done at the instance of the assessee.

3.3 The ITO further observed that the party which is said to have belonged to Delhi, opened the account with New Bank of India, Ajmer, giving the address as Digi Bazar, Ajmer. The special assistant of bank, Shri S.K. Mittal, also deposed before the ITO that he had never known Shri Gopinath and the introduction having been made by one Manohar Ghai from Bansiwala Iron & Steel Rolling Mills, Ajmer, no further enquiries were made by the bank, to which Shri Manohar Ghai replied that he had never known either Shri S.K. Mittal or Shri Gopinath and that he had never been to New Bank of India. Shri Mittal was emphatic in his statement that Shri Gopinath came with Shri Manohar Ghai and on the introduction of Manohar Ghai, the account was opened. Shri Joshi stated that it was further revealed that the account was opened stating that Shri Gopinath was the sole proprietor and account was opened with Rs. 100 on 25-3-1980. Shri S.K. Mittal further stated that the various cheques issued by the assessee-firm were withdrawn out of the account with New Bank of India on three occasions as under :24-12-1975 30,00027-12-1975 30,00029-12-1975 20,000 The said cash were withdrawn through cheques and amount was given to Shri Gopinath, who in turn gave it to Shri Manohar Ghai to be kept in his brief case except on the last occasion of Rs. 20,000 on December 1975 when Shri Manohar Ghai did not accompany Shri Gopinath. Shri S.K.Mittal further deposed that Shri Manohar Ghai reached the bank and made enquiries and raised objection about the said withdrawal by Gopinath.

The ITO observed at this juncture that Shri Manohar Ghai is interested in the firm Madhoram Bhagwandas as he was holding the power of attorney of the assessee-firm. It was under these circumstances that the ITO came to the conclusion that reliance on the statement of Shri S.K.Mittal, who had no connection with the firm, must be placed.

3.4 The ITO, therefore, was of the view that it was well managed affair to give colour of genuineness to the alleged bogus purchase, which had come to light consequent to Shri Joshi's statement before the authorities. The ITO further drew inference from the fact that the entire exercise of opening the bank account was done because the purchases have been shown at Rs. 79,753 and the payment debited in the account books were made to some other party only to circumvent the provisions of Section 40A(3).

3.5 Being a matter under Section 144B of the Act, the AAC gave direction placing reliance on the ITO's finding such as non-existence of the party, non-existence of the transporter and came to the conclusion that the entire purchases were all fake and, therefore, found the addition of Rs. 79,753 as income from undisclosed sources. He similarly hold that the purchases of Rs. 79,753 was made by making cash payments from unaccounted funds and the same is, therefore, disallowable under Section 40A(3).

3.6 The objection was raised in regard to the addition made under Section 40A(3). The objection that was raised was that Section 40A(3) would come into play only when there is income from profits and gains of business. The AAC, however, relied on a Board's circular, wherein it was held that even the income is assessable under Section 57 of the Act, items that are deductible under Section 58(2) of the Act and payments under Section 40A would also be covered. Accordingly, two additions were made by the ITO, one on account of treating the purchases as fake and another for contravention of Section 40A(3) and the additions made were of the like amount of Rs. 79,753 each.

3.7 Aggrieved by this finding of the ITO, the assessee preferred appeal to the Commissioner (Appeals) who, vide his order dated 15-10-1982, after considering the various facts pinpointed out by the ITO and considering the submissions made by the assessee's counsel, held that (a) since the stocks came into existence in January and February 1975 and that it cannot be proved that the payments for these purchases were made after 31-3-1975 and in the absence of any material available with the department, it has to be presumed that the payments would have been made near about the time of purchases and since in such cases it would fall within the financial year ending March, 1975, the said purchases, if at all, could be assessed for 1975-76 only and, accordingly, deleted the addition made on account from undisclosed sources, (b) giving a finding that though the payments were claimed to have been made by cross cheques, in reality this amounted to cash payments which had come back to the assessee and that it is obvious that the payment for purchases have been made in cash to some other party and not by cheque to Jitender Kumar Vinod Kumar. This was found to be in contravention to Section 40A(3) and the addition made by the ITO on this account was sustained. The Commissioner (Appeals) had come to the conclusion in respect of (a) above on the basis of submissions made by the counsel for the assessee that the purchases were made in January and February 1975. This was based on the assessee's submission on the basis of Shri Joshi's statement before the ADI on 11-2-1976, wherein he had mentioned 'these unaccounted stocks were put through by them in the books of account near about in January 1975 at a value of Rs. 80,000'. The Commissioner (Appeals) was satisfied that no party would give credit of over 11 months, when specially that party had never dealt with the assessee and the assessee's partners also never knew the party. He was satisfied that the assessee had made purchases of these goods near about in January and February 1975 by making cash payments. Since the payments had been presumed to be made almost simultaneously as purchases made in January and February 1975, he observed that such transactions would fall within the financial year ending March 1975 and addition on this account must be made as income from undisclosed sources for the assessment year 1975-76.

3.8 As regards the finding of (b) above, he placed reliance on the statement of Shri Joshi as well as Shri S.K. Mittal, the special assistant of New Bank of India. Since he had observed earlier that the payments must have been made in cash near about the time of purchase, he applied provisions of Section 40A(3).

4. Before us, the learned departmental representative, Shri Ruhela, laid emphasis on the dates of purchases as well as the dates of payments alleged to have been made. Shri Ruhela drew our attention to this fact that out of total payment of Rs. 79,753, Rs. 1,252.78 only was made by cash on 28-6-1975, i.e., almost, four months after the date of last purchase as shown by the assessee. Shri Ruhela was of the view that the date of 28-6-1975 is very important and in fact it seems that all the purchases were made on or around June 1975, though it has been shown as purchases made in January and February 1975. Shri Ruhela, therefore, argues that it is a clear case that Section 69A of the Act would apply to this kind of situation and that he had established that the purchases had been made during the period ending March 1976 and, therefore, the ITO's action of treating the same as income from undisclosed sources for the assessment year 1976-77 was very much valid. The dates on which the Commissioner (Appeals) placed reliance, i.e., January and February 1975, are not reliable at all as it stands established in view of the statement of Shri Joshi that no such party by the name of Jitender Kumar Vinod Kumar ever existed and even the transport company was found to be fictitious. It is thus clear that assessee had made purchases from some other party in or around June 1975 and had shown as having purchased in January and February 1975 from Jitender Kumar Vinod Kumar.

5. Dr. R.C. Vaish, the learned Counsel for the assessee, submitted that the addition, if at all, could be made either under Section 69A or 69C of the Act. Dr. R.C. Vaish drew our attention to these two sections. He argued that an addition under Section 69A could be made in any financial year where the assessee is found to be owner of any money, bullions, jewellery or other valuable article which articles are not recorded in the books of account and the assessee offers no explanation about the nature, source of acquisition of such articles or in the opinion of the ITO the explanations so offered are not satisfactory.

Dr. R.C. Vaish further argued that Section 69C talks of expenditure and is again related to financial year. He emphasised that the reading of Section 69C goes to indicate that assessee must have incurred any expenditure in a financial year and he offers no explanation about the source of such expenditure or any part thereof or in the opinion of the ITO, the explanation so offered is not satisfactory, the amount could be deemed to be the income of the assessee of such financial year. Dr.

R.C. Vaish pointed out that the learned Commissioner (Appeals) had confused the issue and that he had gone entirely on presumption. He pointed out that the department has placed reliance on Shri Joshi's statement and this statement says that the unaccounted stocks were put in the books of account near about hi January 1975 at a value of about Rs. 80,000. In view of this, if at all any provision could be said to attract the assessee, it would be Section 69A alone and not Section 69C. In order to attract Section 69C, the assessee must have incurred any expenditure. It is not the case of the department that expenditure has been incurred but the case of the department is that the expenditure could have been incurred which is nothing but presumption.

The facts, as are in record of the department, show that out of total of Rs. 79,753, only Rs. 1,253 were made by cash on 28-6-1975 and the balances were all payments by cheque which were made in December 1975 only. He, therefore, submitted that the Commissioner (Appeals)'s findings that to the extent of the goods having been found recorded in the books of account in January and February 1975, the provisions of Section 69A would apply, is correct which is subject to, of course, the assessee's argument whether the addition could be made at all in that assessment year.

6. Dr. R.C. Vaish, regarding the attraction of Section 40A(3), argued thus : (a) the accounting year of the assessee is 30-6-1975 and in this accounting year, only one payment in cash of Rs. 1,253 has been made.

All the balance payments have been made by cheque in December 1975 which is not disputed by the department, (b) in order to attract the provisions of Section 40A(3), the requirements are : (i) the assessee must have incurred any expenditure and (ii) the payment of such expenditure must have been made by cash. In the instant case, before coming to the conclusion of applying Section 40A(3), it is necessary to establish the above two requirements of Section 40A(3). According to Dr. R.C. Vaish, neither of these two conditions have been established by the department. According to Dr. R.C. Vaish, the reading of the Commissioner (Appeals)'s order goes to establish that it is merely on presumption that addition under Section 40A(3) is being sustained. He further reiterated that from out of nowhere, the learned Commissioner (Appeals) gave a finding in his order that : Even though the said payments were claimed to have been made by cross cheques, in reality these amounted to cash payments which had come back to the assessee.

Dr. R.C. Vaish argued that for this finding of the Commissioner (Appeals), there is no material on record or no evidence has been brought about by the Commissioner (Appeals) in his order to support his conclusion. He further added that this conclusion he had come to, merely because while dealing with the addition on account from unaccounted sources he had made a suggestion that the funds utilised for making the payment to Jitender Kumar Vinod Kumar had been utilised for making payment to some other party in cash and the same has been found by placing reliance on statement of Shri Joshi, wherein he had submitted that he signed on the blank cheques which had been utilised for withdrawing amount from bank account with New Bank of India. Dr.

R.C. Vaish argued that under no circumstances Section 40A(3) can come into play in the assessee's case as it requires definite finding of expenditure having been incurred and which expenditure must have been paid by cash and in the instant case, both these findings are absent.

Dr. R.C. Vaish further argued that Section 40A(3) cannot be applied for imaginary transaction and a fact cannot be imagined but established.

7. Shri Ruhela, the learned departmental representative, submitted that the entire purchases were ghost purchases and similarly, the payments are also to ghost parties. Shri Ruhela further argued that it has been established by the department that the bills which were submitted were not reliable as they did not contain printed numbers and also the party was never traced and even the transport company never existed. In case he argued that the statement of the assessee has to be accepted, he argued that it is bound anybody imagine that an unknown party would give a credit of over 11 months. Thus, it is a clear case of camouflage by the assessee. He added that the important date of 28-6-1975 cannot be overlooked when out of total of Rs. 79,753 payable, only Rs. 1,253 has been paid by cash. The other payments must have also been made by cash on or around that date and, therefore, the only conclusion that could be drawn is that the cash payments have been made by 30-6-1975.

8. We have heard both the parties. We will deal with the departmental appeal first. In this case the question for consideration is, whether the assessee-firm at all made any purchases or has brought into record the unaccounted stock. The entire proceedings in the assessee's case revolve around the statement of Shri Joshi which gets support from the non-production of the party from whom the goods have been purchased as well as the non-existence of the transport company. Shri Joshi's statement of 1-2-1976 reads as under : Madhoram Bhagwandas had accumulated certain unaccounted stock of iron and steel ; these unaccounted stocks were put through by them in the books of account near about January 1975 at a value of Rs. 80,000. The corresponding credit for the sum of Rs. 80,000 was given to Jitender Kumar Vinod Kumar. The credit so given to the account of Jitender Kumar Vinod Kumar was allowed to stand for about a year.

Then in December 1975, one current account in the name of Jitender Kumar Vinod Kumar was opened with the New Bank of India, near Railway Station, Ajmer, and one Gopinath was shown as the proprietor of the concern. On the account opening form of this concern, I was made to sign as Gopinath, proprietor, with cash deposit of Rs. 100.

On the day the account was opened, a cheque book was taken from the bank and I was made to sign 7 or 8 cheques in blank. On the back of these cheques, I also signed as Gopinath at two places. After having taken these blank but signed cheques from me, Madhoram Bhagwandas issued the following cross cheques on their account in favour of Jitender Kumar Vinod Kumar. The cheques were paid into the account of Jitender Kumar Vinod Kumar. One paying-in-slip for one of the cheques was filled in by me. The paying-in-slips for other cheques were got filled by Madhoram Bhagwandas from some other persons, of whom I have no knowledge.

The cheques got issued blank from me on the day the account was opened, were utilised by Madhoram Bhagwandas for withdrawing the proceeds of their cheques going into the account of Jitender Kumar Vinod Kumar. I also remember that on 29-2-1975 one blank cheque was got filled in by Madhoram Bhagwandas from me. That way all the money deposited by them in the account of Jitender Kumar Vinod Kumar was withdrawn by them through the cheques taken in blank from me.

It was on 29-12-1975 that I realised the gravity of the situation in which I had lent myself in signing as Gopinath in the account opening form of Jitender Kumar Vinod Kumar. When I expressed my fears to my employers in this behalf, they immediately called upon me to tender my resignation, which I had to, and relieved me on 30-12-1975 by paying me two months' salary and gratuity.

9. From the above statement on the basis of which the entire assessment is being framed, the fact that emerges out is that the goods were brought into the books in January or February 1975. We are unable to accept the departmental representative's contention that the goods must be treated as having been purchased in or around June 1975 as payment in cash of Rs. 1,253 was made on 28-6-1975. This cannot be accepted as the same is in total contradiction of the facts as per Shri Joshi's statement, according to which the goods were brought into account in January and February 1975. If the goods had surfaced in January and February 1975, then the only proviso that could be attracted by the assessee is the proviso to Section 69A. This is so because (a) in the financial year ending March 1975, the assessee was found to be the owner of the stocks, and (b) the explanation so offered by him was in the opinion of the ITO not satisfactory.

9.1 Section 69C cannot be applied to the assessee's case as for that purpose, the necessary requirement is that the expenditure must have been found to have been incurred and the explanation offered is satisfactory, which is not the case. The assessee, no doubt, as regards these goods, has not established that these were purchases made in the period January and February 1975, and it has also not been able to establish to the satisfaction of the ITO by either producing the party concerned or by producing the transporter company. We are in total agreement with the departmental representative in this connection that the party from whom the purchases had been made, were never known to the assessee and that the whereabouts of this party was not known and this explanation goes to support the view of the ITO more so when this transaction happens to be solitary transaction, though from this particular party it is alleged as many as 6 bills had been received for purchases made. We are, therefore, of the view that the assessee's version that it came to own these goods as a consequence of purchases made in January and February 1975, is not reliable as it had failed to establish to the satisfaction of the ITO that it was really purchases.

Since the entire reliance has been placed on Shri Joshi's statement by the revenue, we are in agreement with the learned Commissioner (Appeals)'s view that the said transaction, having fallen in the financial year ending March 1975, would have to be dealt within the assessment year 1975-76 only and not in 1976-77 as per Section 69A.10. We now come to the question whether Section 40A(3) has been contravened by the assessee or not. It has been held by the authorities that Section 40A(3) has been contravened on the basis of presumption that since the party was unknown to the assessee earlier and that the party by the name Jitender Kumar Vinod Kumar never existed, the purchases must have been made from some other party by cash. We are in total agreement with the learned Counsel for the assessee, Dr. R.C.Vaish, that the provisions of Section 40A(3) are very clear and it requires certain finding of fact such as : 2. such expenditure must have been incurred in cash exceeding Rs. 2,500.

We have also noted that expenditure includes even purchases. The reading of Section 40A(3) goes, therefore, to indicate that the payment in cash must be preceded by incurring of an expenditure. We have already noted above that the entire assessment has centered around the statement of Shri Joshi, wherein he had categorically stated that the unaccounted stocks of the assessee have been brought into books. He further stated that cheques were deposited in the account with New Bank of India, which were later on withdrawn in cash out of cheques which were signed in blank by him. We are in agreement with the learned representative for the assessee, Dr. R.C. Vaish, the provisions of Section 40A(3) cannot be attracted for imaginary argument such as presumption of having made cash purchases from a third party, when it is the case of the revenue that no such purchase was in fact made. We are unable to appreciate the argument of the learned departmental representative that the only cash payment, as shown by the assessee, of 28-6-1975 goes to indicate that all payments in cash must have been made on or around that date. We are unable to accept this contention because there is no such finding by the ITO and which is a precondition for making any disallowance under Section 40A(3). Section 40A(3) disallows such expenditure, which has been incurred in the year in which cash exceeding Rs. 2,500. In the instant case, that the payment for the alleged purchases made in January and February 1975 have all been made by cheques in December 1975. This fact is stated by the ITO in his own order. We are, therefore, of the view that the learned Commissioner (Appeals) was wrong in coming to the conclusion that the provisions of Section 40A(3) apply to the assessee's case. We are of the view that as we have already observed earlier that an addition under Section 40A(3) could be made in respect of that expenditure which has been made in cash and not on the basis of any presumption that cash might have been paid for. Since the department has not established this particular fact that cash has in fact been paid in the year in respect of the purchases made, the addition made of Rs. 79,753 under Section 40A(3) sustained by the Commissioner (Appeals) is, accordingly, deleted.

10.1 The learned Counsel for the assessee also urged that the department had, in the first instance, made only one addition of Rs. 79,753 for this bogus purchase, which was brought into the books in January/February 1975. Only after the case came back before the ITO from the Tribunal with the direction that fresh evidence be examined, the ITO has made two additions of the said amount, one under Section 69 of the Act and the other under Section 40A(3). We agree that both additions cannot co-exist but they would cancel each other. If goods have not been purchased, then they have not been paid for. If that be so, for a bogus purchase shown, Section 40A(3) would not be attracted, more so when the payment is ostensibly by cheque. The whole exercise of proving that the bank account is bogus, the seller firm is bogus and money came back to the assessee is for proving that the assessee's own undisclosed stock was brought into books. On this premise, and that is the only premise on which the revenue can proceed on the basis of Shri Joshi's statement, any addition under Section 40A(3) is clearly ruled out.

11. In the result, the departmental appeal stands dismissed and the assessee's appeal is allowed.


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