JUDGMENT
1. The Tribunal, Allahabad has referred the following question of law under Section 256(1) of the IT Act, 1961 (hereinafter referred to as the Act) for opinion of this Court:
Whether, on the facts and in the circumstances of the case, the Tribunal was correct in sustaining the deletion by the CIT(A) of the following sums added by the ITO under Section 68 of the IT Act, 1961 ?
The original assessment in respect of the assessment for asst. yr. 1976-77 was completed on 5th Sept., 1980. The same was, however, set aside by the CIT(A) with the direction that the ITO should make the assessment de novo from the return stage onwards in accordance with law. Accordingly, the ITO proceeded with the assessment de novo and asked the assessee to explain the nature and source of the various deposits appearing in the books of account of the assessee, in the name of the following persons:
Inasmuch as the assessee was not able to give, according to the ITO. satisfactory explanation with regard to the nature and source of the aforesaid deposits, and inasmuch as the addition in question on account of the said deposits would be more than Rs. 1,00,000, the ITO again prepared a draft assessment order and sent it to the LAC in view of the provisions of Section 144B(1) of the Act. In course of time the IAC gave hearing to the assessee and after hearing him he approved the proposed addition. Accordingly, the ITO made the impugned addition.
The assessee challenged the addition in question before the learned CIT(A) on the ground that the credits in the names of the aforesaid two persons were not on account of receipt of cash at all and that the assessee was a dealer in iron goods and agricultural implements and that the aforesaid persons used to manufacture agricultural implements and sell the same to him on credit and that the credits in the accounts of the said parties represented the value of the goods purchased from time to time and that, as and when the goods were sold, the said suppliers were paid back their dues and that, in course of time, their accounts stood fully paid in the account books of the assessee by the end of the accounting year ending on 31st March, 1978 and that it would be wrong to treat the credits in the accounts of the said creditors as cash credits much less unexplained. In support of the above proposition the assessee produced before the learned CIT(A) his books of account wherein the relevant entries showing the purchases of the goods and the sale thereof appeared. The CIT(A) accepted the assessee's contention that the credits appearing in the name of the aforesaid two persons did not represent deposit of cash by them with the assessee and that they represented the value of the goods supplied by them to the assessee and that therefore, the addition in question under Section 68 of the Act was not warranted. The Department preferred appeal against the aforesaid order of the CIT(A) before the Tribunal. The assessee also filed a cross-objection before the Tribunal. The Tribunal, after considering the assessee's plea that the additions in question could not be made in terms of Section 68 of the Act because the alleged deposits were not cash credits as presumed by the ITO. The observations of the Tribunal were, inter alia, as below:
We notice that the assessee has maintained regular books of account and that it has been dealing in purchase and sale of agricultural implements for a number of years in the past as well as in the future. The assessee's allegation, therefore, that he was engaged in the purchase and sale of agricultural implement, this year has to be accepted. In fact, the assessee's trading account, backed by the books of account shows purchase and sale of agricultural implements wherein the assessee made a profit of Rs. 10,398. The accounts of the assessee on the basis of the aforesaid trading account have been accepted by the ITO and the original assessment as well as the present assessment includes the assessee's income from the aforesaid income has been made, nor has it been the Department's case, that the entries with regard to either the purchases or sales were not genuine, for, if it were not so, the trading result as above will not be accepted. This being so, it has to be taken as an admitted fact in this case that the assessee did make purchases genuinely of agricultural implements etc. of the value of Rs. 2,76,352.
After giving the aforesaid finding, the Tribunal raised the question as to from whom did the assessee make the purchases ? And thereafter proceeded to make the following observations on this subject:
As per its books of account, he had made these purchases, inter alia, from the aforesaid two Kabaris to the extent of Rs. 2,69,254. The case of the ITO is that the said purchases were not made from the said two Kabaris, because their existence is not proved to his satisfaction. So far as his finding that the genuine existence of these two persons has not been proved is concerned, his finding is correct and we sustain it for the reasons given by him. But the said finding does not automatically go to establish that the goods in question had not been purchased by the assessee during the year under consideration. The goods in question having been purchased and the profit arising therefrom having been accepted by the ITO, it appears difficult for us to visualize as to how the debits made by the assessee with regard to the said purchases and the simultaneous credits to the sellers' account could simultaneously be held by him to be cash credits. The credits in the accounts of the said two persons are admittedly on account of these two purchases. These purchases are not bogus, though the names of the persons, from whom the purchases have been made, are bogus. The absence of proof regarding the existence of the two persons cannot, in our opinion, be confused with the question of genuineness of the purchases. If the goods purchased had been accepted by the Department, it would not, in our opinion, be possible for the Department to turn round and say that the debits appearing on account of these purchases in the two wrong names were cash deposits. If in fact the credits on the accounts were cash deposits as alleged, that would mean, in accounting terms, that there would be no debit to purchases account, it would be to cash account. The debit side of the trading account would then go down by Rs. 2,69,254 increasing thereby the trading profit correspondingly. But the ITO does not challenge the correctness of the trading profit, and in doing so, he impliedly accepts the genuineness of the purchases. As purchases w ere on credit, corresponding debits for them should appear in some accounts. Such credits in those accounts would not be for cash but for goods and it would be wrong to call them cash credits. The names of the suppliers may be wrong, but the supplies of the goods were reality. For wrong names of suppliers, the reality of purchases cannot be negatived. The ' finding of the learned CIT(A) was, therefore, correct that it is not a case of cash deposits covered by Section 68. It is a case of purchases having been made by the assessee without properly disclosing the identity of the suppliers. Such a situation is not covered by Section 68 of the Act. We, therefore, confirm the order of the learned CIT(A) who deleted the addition made on account of such credits. In the result the Departmental appeal stands rejected.
3. We have heard Shri Shambhoo Chopra, learned standing counsel for the Revenue.
He submitted that as the respondent-assessee was unable to produce the alleged creditors the provisions of Section 68 of the Act was squarely attracted in the present case and the assessing authority has rightly added the two amounts at the hands of the respondent-assessee. According to him Section 68 of the Act also covers up the case of purchases made on credit.
4. The submission is misconceived. The Tribunal has recorded a categorical finding of fact based on appreciation of materials and evidence on record that the AO had accepted the purchases, sales as also the trading result disclosed by the respondent-assessee. It had recorded a finding that the aforesaid two amounts represented the purchases made by the assessee on credit and, therefore, the provisions of Section 68 of the Act could not be attracted in the present case. We fully agree with the view taken by the Tribunal on this issue, inasmuch as, on the basis of the findings recorded by it that these two amounts represented purchases made by the respondent-assessee on credit and the purchases and sales having been accepted by the Department, the question of addition of the aforesaid two amounts under Section 68 of the Act did not arise inasmuch as the provisions of Section 68 of the Act would not be attracted on the purchases made on credit.
5. We, accordingly, answer the question referred to us in affirmative, i.e., in favour of the assessee and against the Revenue. There will be no order as to costs.