Arijit Pasayat, C.J— Pursuant to directions given by this Court under Section 256(2) of the Income Tax, 1961 (in short the ‘Act’) following question has been referred by the Income Tax Appellate Tribunal, Delhi Bench ‘E’ (in short the ‘Tribunal’) 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?

2. Dispute relates to the assessment year 1971-1972.

3. Factual position as noticed by the Tribunal is as follows. 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. Income Tax Officer 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. Assessee failed to produce the party. A registered letter sent by the Income Tax Officer on 23 October 1973 was received back unserved. Thereafter ITO fixed up a tour from 18 February 1974 to 23 February 1974 to Calcutta and informed the assessee by his letter dated 2 February 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 of the Act 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 neighbourhood it was found that none of them had ever heard of Kalpana Enterprises. ITO was thereafter of the firm view about the non-existence of Kalpana Enterprises at the premises indicated, i.e 71, Canning Street, Calcutta. 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. 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, 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 assessee. On the same day 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 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, ITO treated the sum of Rs. 3,82,750/- as assessee's income from undisclosed sources. Matter was carried in appeal before the Appellate Assistant Commissioner of Income-tax (in short the ‘ACC’). 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 Revenue before the Tribunal. Stand of the assessee was reiterated before the Tribunal while 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 of Income-tax explaining the purchases, were brought on record. In spite of objection from the assessee, 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 Revenue's appeal was dismissed. An application filed under Section 256(1) of the Act by the Revenue was not accepted by the Tribunal and as indicated above, on being moved under Section 256(2) of the Act, the question as set out above has been referred.

4. We have heard learned counsel for Revenue. There is no appearance on behalf, of assessee in spite of notice. Though essentially the conclusion 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 affected 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. Tribunal's conclusion that even if it is accepted that Chedi Lal was only an instrument used by Satya Pal Jain, 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 as without taking into consideration relevant material and placing reliance on irrelevant materials. It is to be noted that 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. Commissioner of Income-tax, (1959) 37 1TR 151(SC), a question of law arises of 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 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 given rises to a question of law. This position has been succinctly stated by the Apex Court in Dhirajlal Girdharilal v. Commissioner Of Income Tax, Bombay, (1954) 26 ITR 736(SC), Cit (Central), Calcutta v. Daulat Ram Rawatmull., (1973) 87ITR 349(SC). 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. (See: Commissioner of Income-tax v. Radha Kishan Nandlal, (1975) 99 ITR 143(SC). The answer to the question therefore, is in the negative, in favour of Revenue and against the assessee.

5. The reference application stands disposed of.