[2001] 117 TAXMAN 628 (DELHI)

HIGH COURT OF DELHI
Commissioner of Income­tax
v.
La Medica
ARIJIT PASAYAT, CJ. AND D.K. JAIN, J.
IT REFERENCE NO. 219 OF 1982
MARCH 15, 2001

Section 143 of the Income­tax Act, 1961 ­ Assessment ­ Additons to income ­ Assessment year 1971­72 ­ Assessee
having failed to produce evidence to prove bona fides of seller from whom it claimed to have purchased raw material,
Assessing Officer treated value of raw material as assessee’s income from undisclosed sources ­ AAC was of view that
though circumstances were unclear, fact remained that goods were pledged with bank after alleged purchase and,
therefore, non­production of seller could not be a basis for doubting genuineness of purchases and/or to infer that
there were fictitious purchases ­ Tribunal upheld deletion of addition ­ Whether once it was accepted that supplies
were not made by said supplier to whom payments were alleged to have been made, question of purchases having
been made from some other source could have weighed with Tribunal as a factor in assessee’s favour ­ Held, no ­
Whether since Tribunal acted on partly relevant and partly irrelevant materials and it was not possible to say as to
what extent latter had influenced its mind, its order gave rise to a question of law ­ Held, yes ­ Whether, therefore,
Tribunal’s order was unsustainable ­ Held, yes
FACTS

For the assessment year 1971-72, the assessee, a manufacturer of allopathic medicines, claimed to have
purchased raw material from ‘KE’ on credit. The ITO having found that the rate at which the purchases were
made was high and that these were the only purchases from the said seller, asked the assessee to produce the
seller along with its books of account. Despite a number of opportunities given to the assessee, the seller
could not be produced. Even the ITO’s personal efforts could not locate the seller or its premises. The ITO,
therefore, treated the value of the raw material as the assessee’s income from undisclosed sources. On
appeal, the AAC was of the view that though circumstances were not very clear, yet the fact remained that the
goods had been pledged with the bank after the alleged purchase and, therefore, no adverse inference could
be drawn.
On the revenue’s appeal, the Tribunal held that notwithstanding the suspicious circumstances, the fact
remained that purchases were made and such payments made could not be doubted. The reference
application under section 256(1) was also dismissed.
On an application for reference under section 256(2) :
HELD

Though essentially the conclusions of the Tribunal had the colour of factual findings, still it was found that the
Tribunal had not taken into consideration relevant materials and had also acted on irrelevant materials. The
fact that the alleged sellers had been found to be persons with no means to effect purchases or to carry on
business was a factor which did not appear to have been considered by the Tribunal in its proper perspective.
What was under consideration was whether the purchases were made from KE as was claimed by the
assessee. Ample material had been brought on record by the revenue to show that the purchases were, in
fact, not made from KE. These were some of the relevant materials which had not been considered by the
Tribunal. Once it was accepted that the supplies were not made by KE to whom payments were alleged to
have been made, the question as to whether the purchases were made from some other source ought not to
have weighed with the Tribunal as a factor in favour of the assessee. The conclusions of the Tribunal were,
therefore, clearly erroneous, contrary to materials on record and had been arrived at without taking into
consideration relevant material and placing reliance on irrelevant materials.
A question of fact becomes a question of law if the finding is not founded on any evidence or material or if it is
contrary to evidence. Similar is the position if it is perverse or there is no direct nexus or link between
conclusion of fact and the primary fact upon which the conclusion is based. Where the Tribunal has acted on
partly relevant and partly irrelevant materials, and it is not possible to say as to what extent latter has
influenced its mind, the finding is vitiated because of use of irrelevant material. That gives rise to a question of
law.
Hence, the Tribunal had no material to come to the conclusion that the impugned sum could not be treated as
the assessee’s income from undisclosed source.
CASES REFERRED TO

Omar Salay Mohamed Sait v. CIT [1959] 37 ITR 151 (SC), Dhirajlal Girdharilal v. CIT [1954] 26 ITR 736 (SC),
CIT v. Daulat Ram Rawatmull [1973] 87 ITR 349 (SC) and CIT v. Radha Kishan Nandlal [1975] 99 ITR 143 (SC).
R.D. Jolly, Ms. Prem Lata Bansal and Ajay Jha for the Applicant.
JUDGMENT

Arijit Pasayat, CJ. - Pursuant to directions given by this Court under section 256(2) of the Income-tax Act,
1961 (‘the Act’) the following question has been referred by the Tribunal, Delhi Bench ‘E’, for opinion:
"Whether, on the facts and in the circumstances of the case, the Tribunal had material to come to the
conclusion that the sum of Rs. 3,82,750 could not be treated as the assessee’s income from undisclosed
sources ?"
Dispute relates to the assessment year 1971-72.
2. Factual position as noticed by the Tribunal is as follows : The assessee was a manufacturer of allopathic
medicines, the most famous being Equibrom which was used as a tranquilliser. It claimed to have purchased
raw-material worth Rs. 3,82,750 from Kalpana Enterprises, 71, Canning Street, Calcutta, on credit. Two
purchases, i.e., one for Rs. 1,83,750 and the other for Rs. 2 lakhs were claimed to have been made. The ITO
found that the rate at which the purchases were made was high. He also found that these were the only
purchases from the alleged seller. On that ground he asked the assessee to produce the alleged seller along
with its books of account. A copy of the accounts of the party from the books of account of the assessee
starting from the date of raising of bills till payments were made was also asked for. Summons under section
131 of the Act were also issued to the alleged seller. The assessee failed to produce the party. A registered
letter sent by the ITO on 23-10-1973 was received back unserved. Thereafter, the ITO fixed up a tour from 18-
2-1974 to 23-2-1974 to Calcutta and informed the assessee by his letter dated 2-2-1974 to produce the party
as well as another seller Medicine House of Calcutta along with complete set of books of account. Copies of the
summons under section 131 were supplied to the assessee for effecting service, who was also requested to be
present for cross-examination. On the date of hearing, neither the assessee nor anybody from Kalpana
Enterprises appeared. He, therefore, deputed an inspector to conduct spot enquiry about the genuineness of
the party. One Mr. M.N. Mahato conducted the enquiry and submitted a report to the effect that there was no
tenant by the name of Kalpana Enterprises at 71, Canning Street, Calcutta. On making enquiries from the
neighborhood it was found that none of them had ever heard of Kalpana Enterprises. The ITO was thereafter of
the firm, view about the non-existence of Kalpana Enterprises at the premises indicated, i.e., 71, Canning
Street, Calcutta. The ITO issued summons to the agent of Indian Overseas Bank, Janpath, New Delhi through
whom the payment was made to Kalpana Enterprises on 24-3-1973. The agent informed on 13-3-1974 that the
account of Kalpana Enterprises was opened with them on 24-3-1973 with four pay orders, three of Rs. 1 lakh
each and the fourth for Rs. 82,750. The address furnished by Kalpana Enterprises was 479, Bartan Market,
Sadar Bazar, Delhi. The name of the person who was operating the bank account was Chedi Lal. One Satya Pal
Jain, partner of Medipac, one of the sister concerns of the assessee-firm, had introduced Chedi Lal to the
bankers. The amount in question was withdrawn by Chedi Lal. Bank was, therefore, required to produce all the
documents relating to Kalpana Enterprises including copy of account, cheques issued for withdrawal of money,
details of payment orders, account opening form, specimen signature card, which were duly produced. The ITO
deputed an inspector to make spot enquiries at 479, Bartan Market, Sadar Bazar, Delhi, where it was found
that one Kapur Chand of F.C. Oswal Hosiery was carrying on business since partition of the country at the
relevant place. Office Secretary of the property was also contacted. It was found out that there was no tenant
named Chedi Lal ever operating at that place. Finding that the bank account was opened by Chedi Lal with the
Delhi address and the bills indicated the address as that of 71, Canning Street, Calcutta, the ITO entertained
doubt and suspicion. It was noted that the account was opened on introduction by Satya Pal Jain, Partner of the
sister concern of the assessee. On the same day the assessee deposited Rs. 3,82,750. The ITO, therefore,
concluded that after withdrawing the amount Chedi Lal must have passed on the same to the assessee
privately. Again the assessee was required to produce Chedi Lal and Satya Pal Jain on 22-3-1974. Neither of
them was produced on the ground that it was not possible to trace Chedi Lal, and Satya Pal Jain was not
available. On the basis of material on record, the ITO treated the sum of Rs. 3,82,750 as the assessee’s income
from undisclosed sources. Matter was carried in appeal before the AAC. Said authority was of the view that
though circumstances were not very clear, yet the fact remained that the goods had been pledged with the
bank after the alleged purchase. Therefore, no adverse inference could be drawn. It was also concluded that
though Chedi Lal and Satya Pal Jain were not produced and that Satya Pal Jain had introduced Chedi Lal, that
cannot be a basis for doubting genuineness of purchases and/or to infer that there were fictitious purchases.
Matter was carried in appeal by the revenue before the Tribunal. Stand of the assessee was reiterated before
the Tribunal while the revenue’s stand was that the whole thing was shrouded in mystery. If Kalpana
Enterprises was a party of Calcutta, it was required to be established by the assessee. On enquiry and on the
basis of materials on record, it was found out that no such person ever existed. The bank accounts were
opened by Chedi Lal on introduction by Satya Pal Jain by giving another fictitious address of Delhi. All these
established that the purchases were non-existent. Certain materials by way of additional documents were also
placed before the Tribunal for consideration. Some of them related to the statement of Chedi Lal and others
were materials to show that he was a petty employee with Satya Pal Jain’s concern. Additionally, voluntary
disclosure statements made by Inder Sain Jain (HUF) and letter addressed to the Commissioner explaining the
purchases, were brought on record. In spite of objection from the assessee, the Tribunal accepted these
materials for consideration. It ultimately came to hold that notwithstanding the suspicious circumstances, the
fact remained that purchases were made and merely because of the involvement of Chedi Lal and Satya Pal
Jain and Inder Sain Jain (HUF), the fact that purchases were made and payments made cannot be doubted.
Accordingly, the revenue’s appeal was dismissed. An application filed under section 256(1) by the revenue was
not accepted by the Tribunal and as indicated above, on being moved under section 256(2), the question as
set out above has been referred.
3. We have heard the learned counsel for the revenue. There is no appearance on behalf of the assessee in
spite of notice. Though essentially the conclusions of the Tribunal have the colour of factual findings, still we
find that the Tribunal has not taken into consideration relevant materials and has also acted on irrelevant
materials. The fact that the alleged sellers have been found to be persons with no means to effect purchases
or to carry on business is a factor which does not appear to have been considered by the Tribunal in its proper
perspective. Materials on record clearly establish that Chedi Lal was a petty employee of a concern of which
Satya Pal Jain was a partner. In fact Satya Pal Jain was a partner of Medipac, one of the sister concerns of the
assessee-firm. On enquiries conducted by the authorities after due notice to the assessee, it was found that
there was no such concern called Kalpana Enterprises at either 71, Canning Street, Calcutta or 479, Bartan
Market, Sadar Bazar, Delhi. Additionally Chedi Lal opened the bank account with the introduction of Satya Pal
Jain and the amounts were withdrawn. If the purchases were really effected from Kalpana Enterprises, it is not
understood as to how some other person, namely, Inder Sain Jain (HUF) accepted that the materials were
supplied by it. The question before the Tribunal was not whether purchases were made from another concern.
What was under consideration was whether the purchases were made from Kalpana Enterprises as was
claimed by the assessee. Ample material has been brought on record by the revenue to show that the
purchases were, in fact, not made from Kalpana Enterprises. These are some of the relevant materials which
have not been considered by the Tribunal. The Tribunal’s conclusion that even if it is accepted that Chedi Lal
was only an instru-ment used by Satya Pal Jain, the assessee was not involved in it, is a conclusion arrived at
without any foundation. On the contrary it has been established by materials on record that assessee knew
that the whole thing was a fictitious arrangement. Once it is accepted that the supplies were not made by
Kalpana Enterprises to whom payments were alleged to have been made, the question whether the purchases
were made from some other source ought not to have weighed with the Tribunal as a factor in favour of the
assessee. The conclusions of the Tribunal are, therefore, clearly erroneous, contrary to materials on record and
have been arrived at without taking into consideration relevant material and placing reliance on irrelevant
materials. It is to be noted that the assessee’s stand was not that it had effected purchases from anybody else.
Its stand throughout was that it had effected purchases from Kalpana Enterprises. It was not open to the
Tribunal to make out a third case which was not even the case of the assessee to hold that the transactions
were real and not fictitious as claimed by the revenue. As observed in Omar Salay Mohamed Sait v. CIT [1959]
37 ITR 151 (SC), a question of law arises if a finding of fact is arrived at by the Tribunal after improperly
rejecting evidence. A question of fact becomes a question of law if the finding is not founded on any evidence
or material, or if it is contrary to evidence. Similar is the position if it is perverse or there is no direct nexus or
link between conclusion of fact and the primary fact upon which that conclusion is based. Where the Tribunal
acts on partly relevant and partly irrelevant materials, and it is not possible to say as to what extent latter has
influenced its mind, the finding is vitiated because of use of irrelevant material. That gives rise to a question of
law. This position has been succinctly stated by the Apex Court in Dhirajlal Girdharilal v. CIT [1954] 26 ITR 736,
CIT v. Daulat Ram Rawatmull [1973] 87 ITR 349 where the Tribunal misdirects itself in law in basing its
conclusions on some evidence ignoring other essential materials on record, a question of law arises - CIT v.
Radha Kishan Nandlal [1975] 99 ITR 143 (SC). The answer to the question, therefore, is in the negative, in
favour of the revenue and against the assessee.
The reference application stands disposed of.