2001 (3) TMI 240 - AT - Income Tax

Summary

Issues Involved:

1. Addition of Rs. 1,08,510 on the ground of bogus purchases.
2. Violation of Section 40A(3) of the Income-tax Act, 1961.
3. Disallowance of Rs. 1,500 on account of salary paid to Smt. Usha Rani.

Issue-wise Detailed Analysis:

1. Addition of Rs. 1,08,510 on the Ground of Bogus Purchases:

The assessee, a dealer in metals, recorded purchases from Kabarias (scrap dealers) using internal vouchers due to the absence of sale bills. The Income Tax Officer (ITO) added Rs. 1,08,510 to the assessment, deeming the purchases from Shri Khazanchi Lal, Kabaria, as bogus. The CIT(A) upheld this addition, agreeing with the ITO's assessment that the purchases were not genuine. The ITO rejected Shri Khazanchi Lal's evidence, citing several reasons, including discrepancies in the affidavit and the improbability of Shri Khazanchi Lal's financial means to conduct such transactions. The Tribunal vacated the addition, noting that the ITO did not cross-examine Shri Khazanchi Lal adequately on key points, and found the evidence provided by Shri Khazanchi Lal credible.

2. Violation of Section 40A(3) of the Income-tax Act, 1961:

The ITO alternatively argued that Rs. 90,735 of the total addition was in violation of Section 40A(3), which restricts cash payments exceeding Rs. 2,500. The CIT(A) surprisingly upheld the entire addition under Section 40A(3), even for transactions below Rs. 2,500, which was not the ITO's original stance. The Tribunal found that the ITO's failure to cross-examine Shri Khazanchi Lal on the insistence for cash payments undermined the justification for the addition under Section 40A(3). Consequently, the Tribunal vacated the addition on this ground as well.

3. Disallowance of Rs. 1,500 on Account of Salary Paid to Smt. Usha Rani:

The ITO disallowed Rs. 1,500 paid as salary to Smt. Usha Rani, alleging it was not a legitimate claim due to her relation to the firm's partners. The CIT(A) noted a positive assertion that she was not related and that the salary was for five months only. The Tribunal found the basis for the disallowance incorrect and vacated the disallowance.

Separate Judgments Delivered by Judges:

The Judicial Member vacated the addition of Rs. 1,08,510, finding the ITO's rejection of evidence and the CIT(A)'s support for the addition unjustified. The Accountant Member disagreed, supporting the addition based on the improbability of Shri Khazanchi Lal's claims and the lack of corroborative evidence. The Third Member concurred with the Judicial Member, emphasizing the consistency of the assessee's gross profit rate over the years and the lack of reason to doubt the purchases. The final decision vacated the addition of Rs. 1,08,510 and the disallowance of Rs. 1,500, allowing the appeal partly.