1978 (9) TMI 13 - HC - Income Tax

High Court Directs Tribunal on Suppressed Diesel Stock Tax Treatment

The High Court directed the Tribunal to refer questions regarding the suppressed diesel stock and its treatment as undisclosed income under Section 40A(3) ... Finding of fact vitiated by conjecture, surmise or extraneous material - question of law arises when there is no evidence to support a factual conclusion - no direct nexus between primary facts and conclusion vitiates finding of fact - onus of proof in distinguishing apparent from real transaction - application of section 40A(3) - whether purchase for resale is an 'expenditure' - Tribunal's duty to state a case under section 256(1)/(2) of the Income-tax ActFinding of fact vitiated by conjecture, surmise or extraneous material - question of law arises when there is no evidence to support a factual conclusion - Whether the Tribunal had any material to conclude that the diesel recorded on July 4, 1970, represented suppressed stock - HELD THAT: - The court examined the authorities establishing when a finding of fact gives rise to a question of law - namely, where it is based on no evidence, is perverse, lacks direct nexus with primary facts, or is influenced by extraneous considerations. Applying these principles, the court concluded that the Tribunal's conclusion was arrived at partly from inferences drawn from proved facts and partly from conjectural considerations (for example, assumptions about availability and readiness of sellers in the small town of Banswara). By resorting to such extraneous and speculative matters the Tribunal travelled beyond probabilities into conjecture, thereby introducing mixed considerations into its finding. Because it is impossible to ascertain the extent to which these irrelevant matters influenced the Tribunal's conclusion, the finding is vitiated and raises a question of law.Questions whether there was any material to support the Tribunal's finding that the diesel was suppressed stock is a question of law and must be stated.No direct nexus between primary facts and conclusion vitiates finding of fact - onus of proof in distinguishing apparent from real transaction - Whether the Tribunal was justified in holding that the sum was includible as income from undisclosed sources - HELD THAT: - The court reiterated that conclusions of fact must have a direct nexus to primary facts and that the party asserting the apparent should not be overborne by conjecture. The Tribunal upheld the addition on the basis that purchases were unverified, vouchers and sellers' names were absent, and on its view of human probabilities. The High Court found that the Tribunal had compounded inferences from record evidence with extraneous suppositions about local market conditions and seller readiness. Such reliance on irrelevant material vitiates the conclusion and converts the factual finding into an issue raising a question of law requiring reference.Whether the sum was rightly held to be income from undisclosed sources raises a question of law and must be stated.Application of section 40A(3) - whether purchase for resale is an 'expenditure' - Tribunal's duty to state a case under section 256(1)/(2) of the Income-tax Act - Whether the Tribunal was correct in holding that the purchases recorded on July 4, 1970, constituted an 'expenditure' within the meaning of section 40A(3) - HELD THAT: - Both parties and the Tribunal accepted that this is a question of law. The High Court referred to Supreme Court authority holding that expenditure incurred in purchasing goods for resale can raise a pure question of law under s.40A(3). On that basis the court concluded that the Tribunal is required to state the case on this legal question for the High Court's determination.The question whether the purchase for resale is an 'expenditure' within s.40A(3) is a question of law and must be stated.Final Conclusion: The reference application is partly allowed. The Income-tax Appellate Tribunal is directed to state the case and refer to the High Court three questions of law: (i) whether there was material to support the Tribunal's conclusion that the diesel recorded on July 4, 1970, was suppressed stock; (ii) whether the Tribunal was justified in treating the sum as income from undisclosed sources; and (iii) whether the purchases recorded on that date amounted to an 'expenditure' within section 40A(3) of the Income-tax Act. Issues Involved:1. Whether the diesel purchase recorded on July 4, 1970, represented suppressed stock.2. Whether the sum of Rs. 14,026 was liable to be included as income from undisclosed sources.3. Applicability of Section 40A(3) of the Income-tax Act, 1961, to the diesel purchase.4. Whether the payment of Rs. 14,026 constituted a single payment attracting Section 40A(3).5. Whether the diesel purchase constituted 'expenditure' under Section 40A(3).Issue-wise Detailed Analysis:1. Whether the diesel purchase recorded on July 4, 1970, represented suppressed stock:The Income-tax Officer (ITO) did not accept the assessee's claim that the diesel was purchased from various private parties to meet temporary scarcity. The ITO observed that the purchases were not verifiable and considered the entry as fictitious, concluding that the assessee was in possession of diesel worth Rs. 14,026 whose source remained unexplained. The Appellate Assistant Commissioner (AAC) and the Tribunal upheld this view, with the Tribunal stating, 'the purchase in question on 4-7-70 has not been proved.' The Tribunal also noted that the stock must have been built up gradually and not acquired in one day.2. Whether the sum of Rs. 14,026 was liable to be included as income from undisclosed sources:The Tribunal concluded that the stock of 18,000 litres of diesel was suppressed stock and the payment of Rs. 14,026 on July 4, 1970, did not explain its acquisition. The Tribunal stated, 'the authorities were, therefore, in our opinion right in adding the value of this diesel as the assessee's income from undisclosed sources as the timing and source of their acquisition remains unproved and unexplained.'3. Applicability of Section 40A(3) of the Income-tax Act, 1961, to the diesel purchase:The ITO invoked Section 40A(3), considering the payment as inadmissible expenditure. The AAC affirmed this, stating that no private party can deal in diesel without a license, and the purchases were not verified from licensed dealers. The Tribunal upheld this view, rejecting the assessee's contention that the word 'expenditure' does not include purchase.4. Whether the payment of Rs. 14,026 constituted a single payment attracting Section 40A(3):The Tribunal found that the payment recorded on July 4, 1970, constituted a single payment, thus attracting Section 40A(3). The Tribunal rejected the argument that no single purchase exceeded Rs. 2,500, stating, 'there was only one single purchase of Rs. 14,026 which goes to show that there was only one payment.'5. Whether the diesel purchase constituted 'expenditure' under Section 40A(3):The Tribunal held that the diesel purchase constituted 'expenditure' within the meaning of Section 40A(3). The Tribunal's decision was based on the interpretation that the word 'expenditure' includes purchases, thus making the payment inadmissible under the said provision.Conclusion:The High Court examined whether the Tribunal's findings raised questions of law. The Court agreed that questions Nos. 1 and 2 raised questions of law due to the Tribunal's reliance on conjectures and surmises. The Court also acknowledged that question No. 5 raised a question of law, supported by the Supreme Court's decision in Janta Metal Supply v. CIT. Consequently, the High Court directed the Tribunal to state the case on questions Nos. 1, 2, and 5 and refer them to the Court.The application was partly allowed, and the Tribunal was instructed to refer the case on the specified questions of law.