B.K Mehta, J.:— The assessee is a registered partnership firm carrying on business of running a ginning and pressing factory and an oil mill. The assessment year under reference is 1970-71, the previous year being Sam vat year 2025, which commenced on October 22, 1968, and ended on November 9, 1969. It should be noted that the Tribunal in the statement of case has stated that the previous year ended on October 30, 1970, which is patently erroneous. In the course of the assessment proceedings for the year under reference, the Income-tax Officer noticed that the assessee had a cash credit account with the Bank of Baroda. The assessee used to take loans from the bank by hypothecation of its goods. The Income-tax Officer, therefore, called for the details of the goods hypothecated with the bank as on certain dates and cross-checked this information with the books of account of the assessee. He found that on March 7, 1969, the assessee had hypothecated 200 bales of cotton valued at Rs. 1,45,000 and 34,000 kilograms of unginned cotton valued at Rs. 68,000. He further found that on March 25, 1969, the assessee had hypothecated 1,20,000 kilograms of cotton seeds valued at Rs. 9,000. On scrutiny of the assessee's stock register, the Income-tax Officer found that on March 7, 1969, the assessee did not possess 200 bales of cotton and 34,000 kilograms of unginned cotton. He further found that the assessee had stock of cotton seeds of only 2,457 kilograms as against 1,20,000 kilograms hypothecated as shown in its statement to the bank on March 25, 1969. The Income-tax Officer, therefore, called upon the assessee to explain the above discrepancy.

2. The assessee's explanation was that 200 bales of cotton and 34,000 kilograms of unginned cotton said to have been pledged on March 7, 1969, belonged to one M/s. Prabhudas Narandas & Bros, of Porbandar and, since the said party was in need of money and to finance it, the assessee had made use of the overdraft facility which it had with the bank. The said M/s. Prabhudas Narandas & Bros, had overdraft facilities up to Rs. 4 lakhs, but when they needed finance beyond this limit, they used to take financial help from the assessee, if its (assessee's) overdraft facility was not exhausted. According to the assessee, it took loan from the bank hypothecating the goods belonging to M/s. Prabhudas Narandas & Bros., and in turn advanced this loan to M/s. Prabhudas Narandas & Bros. It was submitted that the insurance premium in respect of the said goods hypothecated with the bank was also paid by M/s. Prabhudas Narandas & Bros. It was further pointed out that there was debit balance in the account of M/s. Prabhudas Narandas & Bros, with the assessee and the assessee had charged interest on it which interest amount was paid over to the bank. As regards the cotton seeds, the assessee's explanation was that since its limit of overdraft on hypothecation of cotton and kapas (unginned cotton) was exhausted, it had, in order to obtain further facilities beyond the limit, hypothecated cotton seeds weighing 1,20,000 kilograms which were embedded in the unginned cotton of which it had a sufficient stock with it on the day of hypothecation, that is, March 25, 1969.

3. The Income-tax Officer did not accept the explanation of the assessee and, therefore, made additions of Rs. 1,45,000, Rs. 68,000 and Rs. 94,000 being the value of 200 bales of cotton, 34,000 kilograms of unginned cotton and 1,17,543 kilograms of cotton seeds respectively.

4. Being dissatisfied with this order of the Income-tax Officer, the assessee carried the matter in appeal before the Appellate Assistant Commissioner who accepted the assessee's contention that 200 bales of cotton as well as 34,000 kilograms of unginned cotton hypothecated with the bank belonged to M/s. Prabhudas Narandas & Bros, and the assessee hypothecated the said goods for purposes of obtaining advance from the bank so as to finance the said M/s. Prabhudas Narandas & Bros. The Appellate Assistant Commissioner also accepted the assessee's contention with regard to 1,20,000 kilograms of cotton seeds. Since, according to the AAC, the assessee had sufficient stock of unginned cotton on the said date which contained cotton seeds of over 1,80,000 kilograms, it was observed by him that this was the usual practice with businessmen to take advance on cotton seeds embedded in unginned cotton. He, therefore, accepted the assessee's explanation as regards the cotton seeds also. In that view of matter, he deleted all the three additions made by the Income-tax Officer.

5. The Revenue, therefore, carried the matter in appeal before the Appellate Tribunal which by its order dated July 26, 1975, found the explanation of the assessee satisfactory so far as the apparent discrepancy of 200 bales of cotton and 34,000 kilograms of unginned cotton was concerned. The Tribunal, therefore, agreed with the Appellate Assistant Commissioner in so far as he deleted the additions of the two amounts, namely, Rs. 1,45,000 and Rs. 68,000. However, in respect of the hypothecation of 1,20,000 kilograms of cotton seeds, the Tribunal found it difficult to accept the explanation of the assessee. The Tribunal found, as a matter of fact, that the assessee had hypothecated 1,20,000 kilograms of cotton seeds on March 25, 1969, as shown in the statement to the bank. The Tribunal also found that the assessee's stock revealed the stock of cotton seeds of only 2,457 kilograms as on March 25, 1969 as against 1,20,000 kilograms shown in its statement to the bank. The Tribunal noted that admittedly the assessee had taken advances on cotton bales, unginned cotton and cotton seeds. The unginned cotton was treated as an item separate from the cottonseeds for purposes of the bank facilities. The Tribunal also noted that there was nothing to prevent the assessee from taking advances on hypothecation of unginned cotton and there was no evidence shown to the Tribunal which would indicate that the advances on unginned cotton were not available to the assessee. The Tribunal, therefore, reached the conclusion that the assessee appeared to be taking advantage of his stock of unginned cotton to explain away the discrepancy in the stock of cotton seeds and, therefore, the assessee must be having stock of cotton seeds as shown to the bank apart from the cotton seeds embedded in the unginned cotton. The Tribunal, therefore, held that the Income-tax Officer was justified in making addition of Rs. 94,000 being the value of unaccounted stock of 1,17,543 kilograms (i.e, 1,20,000-2,457 = 1,17,543) of cotton seeds said to have been pledged with the bank. The Tribunal, therefore, reversed the order of the Commissioner to that extent. It is in respect of this addition of Rs. 94,000 by the Income-tax Officer, as upheld by the Tribunal, being the value of unaccounted purchases of 1,17,543 kilograms of cotton seeds that the assessee had sought this reference praying for the four questions to be referred to us for our opinion. The Tribunal refused to grant the reference since in the opinion of the Tribunal, no question of law arose from its order. The assessee came to this court which directed the Tribunal to refer the questions to the High Court for its opinion and, accordingly, the following four questions have been referred to us for our opinion:

“1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in confirming the addition of Rs. 94,000 being the value of 1,17,543 kilograms of cotton seeds arising out of discrepancy of the bank statement in hypothecation account?

2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in rejecting the explanation of the assessee while accepting the same regarding other addition of Rs. 2,13,100 pertaining to cotton and unginned cotton?

3. Whether the finding of the Tribunal confirming the said addition of Rs. 94,000 is reasonable, based on any evidence and is arrived at after considering all relevant material on record and the same was justified in rejecting the explanation of the assessee?

4. Whether the Tribunal was justified in holding that there was no satisfactory evidence on record to substantiate the explanation of the assessee?

6. The crucial problem with which we are concerned is, as to whether the Tribunal was right in upholding the addition of Rs. 94,000 being the value of 1,17,543 kilograms of cotton seeds as unaccounted purchases. In other words, whether the Tribunal could have reached the conclusion that the Income-tax Officer was right in adding the amount of Rs. 94,000 being the value of unaccounted purchases. The bone of contention between the assessee and the Revenue is that there is no evidence worth its name to drawan inference that the stock of cotton seeds weighing 1,17,543 kilograms as hypothecated with the bank on March 25, 1969, was unaccounted for. We should, therefore, reiterate the facts which have been found by the Tribunal.

1. On March 25, 1969, the assessee had hypothecated 1,20,000 kilograms of cotton seeds with the Bank of Baroda.

2. As on that date, that is, March, 25, 1969, the assessee's stock register revealed that it had a stock of cotton seeds of only 2,457 kilograms.

3. The Income-tax Officer on noticing this discrepancy called for the details of the goods hypothecated with the bank as on certain dates and cross-checked this information with the books of account of the assessee.

4. The explanation of the assessee in respect of this apparent discrepancy was that since its bank limit, i.e, cash credit account limit of Rs. 2 lakhs granted on hypothecation of cotton and kapas was exhausted, it hypothecated cotton seeds weighing about 1,20,000 kilograms as embedded in the stock of kapas as on that date, i.e, March 25, 1969, weighing about 2,70,59 kilograms which would give an yield of cotton seeds to the extent of 68% weighing about 1,80,000 kilograms of cotton seeds.

5. The assessee had obtained advances on cotton bales, unginned cotton and cotton seeds and, therefore, there was nothing to prevent the assessee from taking advances on hypothecation of the balance quantity of unginned cotton lying with it.

6. No evidence was produced to indicate that the advance on unginned cotton was not available to the assessee.

7. It is as a result of the cumulative appreciation of these circumstances that the Tribunal inferred that the assessee had 1,17,543 kilograms of cotton seeds unaccounted for. With respect to the Tribunal, we are unable to appreciate the inference which has been drawn from the premises which have been established. As stated above, the only pertinent question which arose before the Tribunal was as to whether 1,17,543 kilograms of cotton seeds were unaccounted for and their purchases were from outside the books. It is nobody's case that the assessee had not got sufficient unginned cotton lying with it without any charge as claimed by it in its explanation. It should be recalled that the assessee was claiming that it had 2,70,59 kilograms of unginned cotton with it lying in stock. It should be further recalled that the Tribunal has noted in the statement of case that the Income-tax Officer had called for the details of the goods hypothecated with the bank as on certain dates and cross-checked this information with the books of account of the assessee. The Tribunal also observed that the assessee appeared to be taking advantage of the stock of unginned cotton to explain away the discrepancy in the stock of cotton seeds. As a matter of fact, we do not find any positive evidence which could possibly be pressed into service so as to warrant the inference drawn by the Tribunal. Two circumstances of negative character have been emphasised by the Tribunal. Firstly, there were advances on hypothecation of the unginned cotton and, secondly, that there was no evidence to indicate that the advance on unginned cotton was not available to the assessee. We fail to understand as to how from these two circumstances, if at all these can be said to be circumstances and apart from the evidence which has been produced by the assessee to show otherwise, an inference can reasonably be drawn that this quantity of 1,17,543 kilograms of cotton seeds were unaccounted for. As a matter of fact, the assessee has produced evidence to show that its (overdraft) limit was exhausted and, therefore, till the assessee secured to the bank by hypothecating further quantity of goods, no additional advances were possible. The assessee had produced a certificate from the Agent of Porbandar Branch of the Bank of Baroda to show that the limit granted for advances in cash credit account of the assessee was exhausted. The certificate is dated August 27, 1973, and it reads as under:

“This is to certify that M/s. Uganda Industries Company were allotted a special level of Rs. 2 lakhs of drawing against the stock of cotton and kapas in the year 1969.”

8. The Appellate Assistant Commissioner has noted that the assessee had produced the ledger to show that on March 25, 1969, it had already drawn Rs. 2 lakhs on the basis of the hypothecation of kapas. This fact is also borne out by the explanation rendered by the assessee, vide its letter dated December 26, 1970, in reply to the explanation sought for by the Income-tax Officer, in the light of the apparent discrepancy of the stock position in the stock register and the bank's statement showing the hypothecation of 1,20,000 kilograms of cotton seeds. The explanation by the assessee was that unless it was in a position to give by way of hypothecation some quantity other than the cotton and kapas, no further advances were possible. Assuming that the advances would have been possible, even on further hypothecation of kapas lying in stock with the assessee, even then, from this single circumstance, if at all it can be described as one, no reasonable person could have reached the conclusion that the failure on the part of the assessee to obtain further advances on the basis of hypothecation of kapas lying in stock with him would lead to the conclusion that the cotton seeds which it hypothecated with the bank weighing 1,20,000 kilograms were unaccounted for. In our opinion, this single innocuous circumstance cannot warrant the inference which the Tribunal has drawn. As a matter of fact, logically also the case of the Income-tax Officer does not stand on scrutiny. We can do no better than merely quote what the Appellate Assistant Commissioner has succinctly stated in this connection. The Appellate Assistant Commissioner observes, and rightly in our opinion, as under:

“13 To say that the appellant had purchased 1,20,000 kilograms of cotton seeds outside the books and hypothecated this stock with the bank, drew amounts against such stock, bringing this amount in the books of accounts, and finally sold the entire stock outside the books, is to stretch one's imagination too far….”

9. In that view of the matter, therefore, we accept this reference and answer questions Nos. 1, 3 and 4 in the negative, that is, in favour of the assessee and against the Revenue. Question No. 2, in our opinion, need not be answered. There should be no order as to costs in this reference on the facts and in the circumstances of this case.