Commissioner of Income Tax vs A.R. Chockalingam Chettiar and Sons

C.N. Ramachandran Nair, J.—This appeal is filed by the revenue challenging the order of the Tribunal sustaining the order of the Commissioner (Appeals) cancelling addition in assessment on account of bogus purchases to inflate purchase cost and also addition made on account of unexplained trade credits.

We have heard standing Counsel appearing for the revenue and counsel appearing for the respondent/assessee.

The assessee was a dealer in scrap items viz., copper, brass, lead and aluminium. In the course of checking account for the assessment year 1991-92, the assessing officer found that the assessee has made purchase of scrap from local parties amounting to 8.2833 tons and even though purchases were entered in the purchase ledger folios 17 and 18, the same were not included in the stock position as on 31-3-1991. Since stock difference was noticed, the assessing officer held that the purpose of accounting the said bogus purchase is a clear case of inflation of purchase to reduce tax liability. He, therefore, made addition to the value of purchase inflation at Rs. 4,48,126. Similarly, the assessing officer noticed that credit purchases were accounted to the extent of Rs. 3,11,146. However, when notices were issued to the creditors, the notices were returned unserved stating that no such party exists. Consequently, this amount was added to the income u/s 68 of the Income Tax Act.

Before the first appellate authority, the assessee contended that there was no purchase inflation and shortage of stock noticed by the officer is on account of wastage of materials, which got included while purchasing scrap. Similarly, addition u/s 68 was considered by the first appellate authority as the one u/s 69 and here again, the appellate authority held in favour of the assessee by holding that the assessing officer has not established that the creditors are bogus. In further appeal by the department, the Tribunal confirmed the order of the Commissioner (Appeals) against which this appeal is filed by the revenue.

After hearing both sides and after going through the orders of the Tribunal and the first appellate authority, we are unable to sustain their finding on the first question because the assessee has taken inconsistent stand before the authorities. At first, the assessee took the stand that purchases of the quantity were accounted in ledger folios 17 and 18 and the omission was only in including the same in the stock. However, the assessee later retracted from this contention and took the stand that the shortage in stock is on account of waste materials like gunny bag and impurities found in metal scraps, etc. It is the second explanation that found acceptance with the first appellate authority and the Tribunal. As already stated, the assessee is a dealer in scrap metals like copper, aluminium, etc., the value of which is incomparably higher than the value of gunny bag and other impurities etc. it is against commonsense to assume that the scrap dealer will purchase scrap materials with impurities, packing materials, etc., i.e., on gross weight on the price applicable to the scrap metal. It is the normal practice that when purchase is made, a reduction is always made on the quantity of waste materials so that the price paid is more or less for the actual quantity of scrap purchased. If the difference in stock is only a small quantity, we would not have interfered with the order of the Tribunal in accepting their explanation. However, in this case, it is seen that weight of waste material claimed by the assessee is as much as 8.2833 tons, which is intrinsically a bogus claim. When assessee itself contends that it omitted to include the actual purchase in the stock entry, there is no justification to the first appellate authority and the: Tribunal to accept the alternate explanation based on assessees claim. We therefore allow the departments appeal on this issue by reversing the order of the Tribunal, confirming-the order passed by the first appellate authority and by restoring the assessment.

The next question raised pertains to the addition on credit entries which were found to be bogus by the assessing officer. Standing counsel for the revenue rightly pointed out that the transaction is unrealistic because purchase is from hawkers and the names of hawkers entered in the books were found to be bogus because notice issued to the creditors were returned with the endorsement that no such person exists. In answer to this, counsel for the assessee contended that even though notices were dishonoured by them, in the next year, all of them were made the payment and the department allowed that claim. Even though we uphold the contention of the department that the burden of proof of credit by producing the parties is on the assessee as correct, in view of the contention of the assessee that in subsequent year, the very same creditors have been made payment and the department has accepted the same, we set aside the orders of the Tribunal and the first appellate authority and remand the matter to the assessing officer for consideration of the same. If in the subsequent year, the creditors are identified and payments were made by the assessee and the same was accepted by the department, the addition made under this head i.e., Rs. 3,11,146 will be deleted.

The appeal is allowed in part as stated above.