M.C Jain, J.:— This is an application under s. 256(2) of the Income-tax Act, 1961 (hereinafter referred to as “the Act”), presented by M/s. Fakhri Automobiles, Banswara. It arises under the following circumstances:

The applicant-firm carries on business in petrol, diesel, kerosene, motor spare parts, etc., at Banswara, The accounting year of the applicant-firm for the assessment year 1971-72 ends on 30th October, 1970. On the 4th July, 1970, the applicant-firm debited in its cash book a sum of Rs. 14,025.75 against the purchase price of 18,000 litres of diesel. The quantity of diesel purchased was recorded in the stock book of diesel on 4th July, 1970, as under:

“1,500, 1,000, 2,100, 1,500, 2,100, 1,800, 1,500, 2,100, 2,100, 1,500, 18,000 litres.”

2. In the cash book, entry was made in respect of purchase of diesel in one lump sum. In respect of these purchases, the firm did not obtain purchase voucher, but Shri Kalimuddin, partner of the applicant-firm, filed an affidavit to the effect that during samvat year 2026 the firm had purchased 18,000 litres diesel worth Rs. 14,025.75 from various private parties to meet the temporary scarcity in the area and the said purchases were recorded in one lump sum in the books of account of the firm on July 4, 1970; that no single purchase of diesel so recorded was of the value of Rs. 2,500 or more. The ITO did not accept the version of the assessee that the diesel was purchased by the firm in the manner indicated in the affidavit and observed that it has not been clarified by the assessee as to from whom the purchases were made and it was not possible in such a small locality as Banswara to get such a huge quantity of diesel, about 90 drums, from private parties. He further observed that the assessee's explanation was not at all convincing. It was further observed that the purchases are not verifiable. It was also observed that the assessee has inflated the purchase of diesel by introducing a fictitious entry while actually no purchase has been made. He, therefore, held that the assessee was in possession of diesel amounting in value to Rs. 14,026 on July 4, 1970, whose source of acquisition remained not explained. The ITO also invoked the provisions of s. 40A(3) of the Act and considered the payment to be an expenditure and as such it was taken as inadmissible under the aforesaid provision. On appeal by the assessee, the AAC affirmed the order of the ITO and further pointed out that no private party can deal in diesel unless licensed to do so and if the purchases were from the licensed dealers, there was no reason why the assessee should not get purchases verified from them. The evidence produced by the assessee was considered to be self-created evidence and it was taken that it did not prove the assertion of the assessee and the applicability of s. 40A(3) of the Act was also maintained. The assessee went in appeal before the Income-tax Appellate Tribunal (hereinafter referred to as “the Tribunal”). The Tribunal vide its order dated October 22, 1974, found as under:

“We are, therefore, of the opinion that the purchase in question on 4-7-70 has not been proved. The inference of the Income-tax Officer that the stock of 18,000 litres of diesel sold is the suppressed stock in the circumstances is correct. It could not have been acquired in one day. From the evidence on record and having regard to human probabilities, it is also clear to us that it must have been built up gradually. The payment of Rs. 14,026 from cash book on 4-7-70 would not be the source of this gradual acquisition of this stock for it is the alleged outgoing of cash against the alleged purchases on 4-7-70 alone. Once the purchases are shown not to have been there on July 4, 1970, the source loses its value as explaining the acquisition of diesel. 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. The Tribunal proceeded to consider the matter and gave its reasoning to arrive at the above findings in the following manner:

“In our opinion, it is difficult to say on the basis of the evidence on record that the stock of 18,000 litres of diesel was not existing with the assessee on 4-7-70. Apart from the affidavit of Shri Kalimuddin, there is intrinsic evidence in the record of the assessee itself to show that the stock of 18,000 litres of diesel was there, for, without that, there could have been no sale of 18,000 litres of diesel. The ???ubsequent sale which has not been denied, in fact, proves the stock. But the question is, was this stock purchased on July 4, 1970, as alleged by the assessee, or was it already lying with the assesseee as suppressed stock as presumed by the Income-tax Officer. There are three pieces of evidence to support the version of the assessee: (i) entries in the stock book, (ii) entry in the cash book, and (iii) the affidavit of Shri Kalimuddin. The entries in the books are not only not supported by vouchers but do hot indicate even the names of the sellers. The authorities below have indicated the factors which make the probability of purchase of 18,000 litres on one single day remote. The Appellate Assistant Commissioner points out that only a licence-holder could sell the diesel to the assessee and it is admitted by the assessee that the alleged purchases are not from the licence-holders. The Income-tax Officer has pointed out in his order that Banswara is such a small town that the procuring of 18,000 litres (i.e, 90 drums) from unlicensed sources is out of question. It was averred before the Appellate Assistant Commissioner that the purchases were made surreptitiously from the Government departments. But he pointed out, and rightly so, that there is no presumption of illegality of an act unless the fact is proved beyond any reasonable doubt. Then there are as many as ten separate purchases according to the assessee. Were they from ten different departments? If so, are there ten different Government departments in Banswara which could have the requisite stock of diesel to sell it to the assessee after stealing it from the Government? Or were there ten different persons selling from the same or a few departments? Were all these departments and/or persons in a state of readiness to sell diesel to the assessee at the moment of its asking? There is no admitted instance of such purchases earlier. How could then the assessee locate the source of such surreptitious sales all of a sudden? All this is shrouded in mystery known only to the assessee and it does not want to throw any light on them for understandable reasons. Without such evidence, the occurrence of such event does not appear to us to be probable in the small town of Banswara. Does the affidavit add anything to the content of the evidence or its reliability? In our opinion, it does not, because the affidavit is from a person who knows all the details of the alleged purchase and yet he is withholding the vital information. No reliance can be placed on the deposition of such a person unless he backs up the averment by acceptable evidence.”

4. As regards the applicability of s. 40A(3), (as there is only one entry in respect of the payment of price of the diesel purchased) it was held that it was only one payment and the assessee's contention was repelled that the word “expenditure” does not include purchase. The applicant-firm thereafter moved an application under s. 256(1) of the Act requiring the Tribunal to state the case to this court on the following questions of law alleging that the same arise out of the Tribunal's order:

“1. Whether the Income-tax Appellate Tribunal had any material to arrive at its conclusion that diesel of Rs. 14,026 (18,000 litres) recorded on July 4, 1970, in the cash book and stock register of the applicant-firm represented the suppressed stock?

2. Whether the Income-tax Appellate Tribunal was, at any rate, justified in holding that the aforesaid sum of Rs. 14,026 was liable to be included in the total income of the applicant-firm as ‘income from undisclosed sources’?

3. Whether the provisions of section 40A(3) of the Income-tax Act, 1961, were at all applicable to the purchases of diesel worth Rs. 14,026 recorded on July 4, 1970, when no single purchase was admittedly of the value exceeding Rs. 2,500?

4. Whether there was any material before the Tribunal in arriving at its conclusion that the payment of Rs. 14,026 recorded on July 4, 1970, constituted only one payment so as to attract the provisions of sec. 40A(3) of the Income-tax Act, 1961?

5. Whether the Income-tax Appellate Tribunal was correct in holding that the purchases of diesel worth Rs. 14,026 recorded on July 4, 1970, was ‘an expenditure’ within the meaning of sec. 40A(3) of the Income-tax Act, 1961?”

5. The learned Tribunal, after hearing both the parties, rejected the application on February 14, 1975. Hence, the applicant-firm has presented this application under s. 256(2) of the Act praying for issuing a direction to the Tribunal to state the case and refer the same to this court on the question mentioned above for our answer. We have heard the learned counsel for the applicant and the learned counsel for the non-applic???t.

6. In this application, the main controversy centres round the question whether any ???uestion of law arises out of the order passed by the Tribunal. So far as question No. 5 is concerned, it is not in dispute that it is a question of law. The Tribunal too has opined and held that it is a question of law and both the parties have also conceded before us that it is a question of law, but the Tribunal did not refer this question on the ground that questions Nos. 1, 2 and 4, stated supra, do not involve any question of law but are based on findings of facts, and, therefore, referring of question No. 5 would be merely of academic interest and would serve no useful purpose. The Tribunal also found that question No. 3 raises a question of law, but on the basis of the same reasoning, the Tribunal declined to state the case on question No. 3. The reasoning given by the Tribunal for not stating the case on questions Nos. 3 and 5 appears to be sound; so it would be proper that we may first examine as to whether questions Nos. 1, 2 and 4 are questions of law and whether it was obligatory for the Tribunal to state the case on these questions.

7. The learned counsel for the applicant strenuously and vehemently urged before us that although the finding regarding the stock of diesel being the suppressed stock and represented the assessee's income from undisclosed sources, is a finding of fact, yet this finding is based on no evidence, and is mostly based on surmises and conjectures to arrive at this finding. It was submitted that from the order of the Tribunal, it would be clear that the Tribunal has not only drawn inferences of facts from the primary facts established on record, but has resorted to extraneous and irrelevant considerations. It was pointed out by the learned counsel that the Tribunal took into consideration the non-possibility of purchase of 18,000 litres of diesel in one single day at a small place like Banswara and also wrongly refused to accept the possibility of the sellers being in a state of readiness to sell the diesel to the assessee. The Tribunal also took into consideration that the assessee could not locate the source of surreptitious sales all of a sudden. Employing this reasoning, the Tribunal wrongly found that the occurrence of such an event does not appear to be probable in the small town like Banswara. It was submitted that it is difficult to say to what extent the Tribunal's mind was affected by the surmises taken into consideration and as such questions Nos. 1 and 2 raise questions of law. In support of his contention the learned counsel placed reliance on the cases: Dirajlal Girdharilal v. CIT, [1954] 26 ITR 736 (SC), Sree Meenakshi Mills Ltd. v. CIT, [1957] 31 ITR 28 (SC), Omar Salay Mohamed Sait v. Commissioner Of Income Tax, Madras , [1959] 37 ITR 151 (SC), Lalchand Bhagat Ambica Ram v. CIT, [1959] 37 ITR 288 : AIR 1959 SC 1295, Roshan Di Haiti v. CIT, [1968] 68 ITR 177 (SC), CIT v. Daulat Ram Rawatmull, [1973] 87 ITR 349 (SC) and CIT v. S.P Jain, [1973] 87 ITR 370 (SC).

8. On the other hand, the learned counsel representing the department vehemently submitted that the Tribunal has arrived at the findings on the basis of evidence on record and not on surmises and conjectures. In order to arrive at the findings of facts, the probabilities can be considered as the purchases were not supported by the vouchers and the assessee failed to give out the names of his sellers so that the sales could be verified. It was proper and justified on the part of the Tribunal to infer that the sales were not genuine and the Tribunal reached the findings of facts disbelieving the affidavit submitted by Kalimuddin and the entry of the cash book and of the stock register. Along with this the Tribunal also took note of the probabilities of purchase of diesel being made in such a huge quantity in one day in a small place like Banswara. He argued that it cannot be said that the findings in any way are based on surmises and conjectures and as such no question of law arises in respect of the aforesaid findings and the Tribunal rightly declined to state the case to this court. The learned counsel has supported his contention by citing Bai Velbai v. CIT, [1963] 49 ITR (SC) 130; CIT v. Bharat Engineering and Construction Co., [1972] 83 ITR 187 (SC), CIT v. Usmanbhai Islambhai Tonk, [1973] Tax LR 760 (Raj), CIT v. Himangshu Sekhar Chakravarty, [1974] 94 ITR 318 (SC) and Lakhmichand Baijnath v. CIT, [1959] 35 ITR 416 (SC).

9. We have given our best consideration to the contentions advanced before us by both the sides.

10. Before examining the inferences and the reasoning adopted by the Tribunal to arrive at the findings regarding purchase of 18,000 litres of diesel and whether the same raises a question of law or not, it would be proper to consider first the case law cited by the parties. On a consideration of the case law, it would be clear as to when the findings of facts raise a question of law. It is not necessary to examine the facts of the cases referred to by both the parties and in our opinion it would be sufficient to consider the propositions of law laid down in the cases. It may also be stated here that the principle has been iterated and reiterated and so it will not be necessary to deal with the principle enunciated in each case cited by the parties.

11. In Lalchand Bhagat Ambica Ram v. CIT, [1959] 37 ITR 288 : AIR 1959 SC 1295, relying on the earlier cases of Dhirajlal Girdharilal v. Commissioner Of Income Tax, Bombay, [1954] 26 ITR 736 (SC) and Sree Meenakshi Mills Ltd. v. CIT, [1957] 31 ITR 28 (SC), their Lordships of the Supreme Court observed as under (AIR headnote):

“The Income-tax Appellate Tribunal is a fact-finding Tribunal and if it arrives at its own conclusions of fact after due consideration of the evidence before it, the Supreme Court will not interfere. However, the finding of the court of fact should not be vitiated by reason of its having relied upon conjectures, surmises and suspicions not supported by any evidence on record or partly upon evidence and partly upon inadmissible material. Where the fact-finding authority acts without any evidence or upon a view of the facts which cannot reasonably be entertained or the facts found are such that no person acting judicially and properly instructed as to the relevant law could have found, the Supreme Court is entitled to interfere. On no account whatever, should the Tribunal base its findings on suspicions, conjectures or surmises nor should it act on no evidence at all or on improper rejection of material and relevant evidence or partly on evidence and partly on suspicions, conjectures and surmises and if it does anything of the sort, its findings even though on questions of fact will be liable to be set aside by the Supreme Court.”

12. In Bai Velbai v. CIT, [1963] 49 ITR (SC) 130, it was observed that (Headnote):

“A finding of fact does not alter its character as one of fact merely because it is itself an inference from other basic facts; but a finding on a question of fact is open to attack under section 66 of the Indian Income-tax Act, 1922, as erroneous in law when there is no evidence to support it or if it is perverse or has been reached without due consideration of the several matters relevant for such a determination.”

13. In Roshan Di Haiti v. CIT, [1968] 68 ITR 177 (SC), the proposition was laid down in broader terms and it was stated that “whether the conclusion of the Appellate Tribunal on a question of fact is based on any material is a question of law”. In this case, the contention of the assessee was that there was no material on which the conclusion of the Tribunal could be founded and in this context the above proposition of law was stated. But considering the proposition itself, it would be clear that the conclusion on a question of fact on any material is a question of law.

14. The matter has been further elaborately examined in CIT v. Daulat Ram Rawatmull, [1973] 87 ITR 349 (SC). In this case, it has also been observed that the onus of proving that the apparent was not the real was on the party who claimed it to be so. On the basis of this observation it was contended that from the assessee's evidence it was apparent that the diesel was purchased on July 4, 1970, as evidenced by the entry in the cash book and the stock register. It was for the department to prove the contrary, that is, to prove that the apparent is not the real and the question ought to have been examined by the Tribunal in the light of this principle of onus of proof. In this case, their Lordships of the Supreme Court further observed as under (Headnote):

“There should be some direct nexus between the conclusion of fact arrived at by the authority concerned and the primary facts upon which that conclusion is based. The use of extraneous and irrelevant material in arriving at that conclusion would vitiate the conclusion of fact because it is difficult to predicate as to what extent the extraneous and irrelevant material has influenced the authority in arriving at the conclusion of fact.

Findings on questions of pure fact arrived at by the Tribunal are not to be disturbed by the High Court on a reference unless it appears that there was no evidence before the Tribunal upon which they, as reasonable men, could come to the conclusion to which they have come; and this is so even though the High Court would on the evidenc??? have come to a conclusion entirely different from that of the Tribunal. In other words, such a finding can be reviewed only on the ground that there is no evidence to support it or that it is perverse. Further, when a conclusion has been reached on an appreciation of a number of facts, whether that is sound or not must be determined, not by considering the weight to be attached to each single fact in isolation, but by assessing the cumulative effect of all the facts in their setting as a whole.

When a court of fact acts on material partly relevant and partly irrelevant, it is impossible to say to what extent the mind of the court was affected by the irrelevant material used by it in arriving at its finding. Such a finding is vitiated because of the use of inadmissible material and thereby an issue of law arises. Likewise, if the court of fact bases its decision partly on conjecture, surmises and suspicions and partly on evidence, in such a situation an issue of law arises.”

15. With regard to the appreciation of evidence by the Tribunal after reiterating the principle already enunciated in earlier decisions, their Lordships of the Supreme Court in CIT v. S.P Jain, [1973] 87 ITR 370, observed thus (Headnote):

“Any crystallization of the view of (the Supreme Court) and its reluctance to interfere with the findings of fact should not make the Tribunals or the income-tax authorities smug in the belief that, as the courts do not interfere with the findings which form the bed-rock upon which the law will be based, they can act on that assumption in finding facts or by their mere ipse dixit that they are findings of fact wish it to be so assumed irrespective of whether they are sustainable in law or on the materials on record.”

16. In CIT v. Bharat Engineering and Construction Co., [1972] 83 ITR 187 (SC), on the facts of that case it was found that what inference should be drawn from the facts proved is a question of fact and the Tribunal's finding on that question is final. It was observed that in the absence of satisfactory explanation from the assessee the ITO may assume that cash credit entries in its books represent income from disclosed sources. In that case, the ITO brought to tax the cash credit entries totalling Rs. 2,50,000 taking them to be the income from undisclosed sources, but the Tribunal felt that the entries could not represent the income or profits of the assessee-company, as they were all made very soon after the company commenced its activities.

17. In Addl. CIT v. Usmanbhai Islambhai Tonk, [1973] Tax LR 760 (Raj), it was observed whether the explanation offered by assessee relating to a cash credit entry is satisfactory or not is a question of fact. It was also observed that when the conclusions are drawn on analysis of accounts, the finding thereon is a question of fact and not of law.

18. In CIT v. Himangshu Sekhar Chakravarty, [1974] 94 ITR 318 (SC). the Appellate Tribunal held that though there was profiteering in procurement and supply of paddy and rice, the profiteering could be attributed only to the firms through which the respondent, an association of persons, got all its procurements, and in which its members were partners, and not to the respondent, and that the respondent had no share in the profits earned in the procurement. It was held that the finding of the Tribunal was one of fact and was fully supported by the evidence on record and no question of law arose out of the order of the Tribunal.

19. In Lakhmichand Baijnath v. CIT, [1959] 35 ITR 416 (SC), certain sums were found to be credited and the explanation regarding the receipt of the amount given by the assessee was rejected by all the I.T authorities as untenable, the credits were considered to be treated as business profits which are chargeable to tax and it was observed that the question whether a sum represents the price of family jewels sold or whether it is a concealed business profit is a question of fact which is open to attack in a reference under s. 66, only if it could be shown that there is no evidence to support it or that it is perverse.

20. From the consideration of the above cases, it would appear that a finding of fact raises a question of law if it is based on no evidence or it is perverse or if there is no direct nexus between conclusion of fact and the primary fact upon which that conclusion is based, the conclusion of fact would be vitiated if extraneous or irrelevant consideration is made use of in arriving at the conclusion, for, it cannot be said to what extent the mind of the authority is influenced by such material. The probabilities can be taken into consideration, but if the court of fact bases its decision partly on conjectures, surmises and suspicions and partly on evidence and probabilities, in such a situation, a question of law would arise. It would depend on the facts and circumstances of each case as to when the finding of fact would raise a question of law. In the light of the principle enunciated in the cases considered above, the finding arrived at by the Tribunal needs scrutiny. In has to be seen whether the finding is based on evidence or partly it is based on evidence and partly on extraneous and irrelevant considerations or surmises and conjectures.

21. While rejecting the reference application, the learned Tribunal stated that questions Nos. 1, 2 and 4 are clearly questions of fact, for they arise out of the inference of facts from other facts without applying any principle of law to them. It was also stated that the Tribunal has in detail given the material in its order on which it based its conclusion that the diesel of the value of Rs. 14,026 recorded as paid for, in the cash book, represented the assessee's past stock acquired over a long period and this investment represented the assessee's income from undisclosed sources. The Tribunal did not consider that in arriving at the said finding of fact only inferences from proved facts have been drawn or to some extent surmises and conjectures also entered into consideration of the Tribunal in arriving at the finding. It is true that the Tribunal in its order in appeal dated October 22, 1974, in its conclusion, has stated that the finding has been arrived at on the basis of evidence on record and regard has been made to human probabilities. Bat it has been contended before us that the matters, which have been considered by the Tribunal, are not matters relating to probabilities. It is urged that there was no data before the I.T authorities as to the stock position of diesel at Banswara and also as to the consumption of diesel at Banswara. The learned counsel submitted that the Mahi Dam was under construction at that time and it is possible that there used to be sufficient stock of diesel with the dealers and private parties generally at Banswara and on a particular day there might be scarcity and the assessee-firm purchased the diesel from the private parties to meet the temporary scarcity. It was urged that the learned Tribunal has drawn on surmises and conjectures to support its conclusion. There is nothing inherently improbable in the purchase of 18,000 litres of diesel by the assessee on one single day, that is, on July 4, 1970. The learned counsel for the applicant urged that the finding should have been based simply on the basis that, in the absence of vouchers and in the absence of names of the sellers, entries in the cash book and stock register and the affidavit cannot be believed and thus the purchases could not be verifiable, and the stock is taken to be past stock and its cost is an income from undisclosed sources, but the Tribunal had proceeded to consider the extraneous matters and to what extent the Tribunal's mind has thereby been affected, cannot be known, and so the finding of fact raises a question of law.

22. We are in agreement with this contention of the learned counsel that the finding has been arrived at by the learned Tribunal, partly from inferences of the proved facts and partly it is based on surmises and conjectures. It was nothing but a guess or an assumption on the part of the Tribunal that at Banswara, being a small town, such a large quantity of diesel could not be available and the readiness of sellers and location of them by the assessee was not possible. Such and like considerations cannot be taken to be considerations of probabilities. Rather, such considerations only appear to conjectural. In our opinion by taking into consideration such extraneous matter, the Tribunal, to some extent, travelled in the realm of imagination and formed an opinion on that basis. In any case, there is a semblance of basing the finding on mixed censiderations. In this view of the matter, in our opinion, questions Nos. 1 and 2 raise questions of law.

23. With regard to questions Nos. 3 and 4, learned counsel for the applicant conceded that they did not raise any questions of law in view of the fact that the Tribunal has found that there was only one single purchase of Rs. 14,026 which goes to show that there was only one payment. The payment is, therefore, clearly caught in the net of sub-s. (3) of s. 40A of the Act. So, on these questions, the Tribunal may not be required to state the case.

24. As regards question No. 5 it is an admitted case of both the parties that it raises a question of law and for that there is also a direct authority of the Supreme Court in Janta Metal Supply v. Commissioner Of Income Tax, U.P., [1977] 110 ITR 672 (SC). In this case, the Supreme Court, after setting aside the judgment of the High Court, directed that the High Court shall call for a statement of case from the Tribunal on the following question:

“Whether the amount spent by the assessee in purchasing goods for the purpose of resale is expenditure within the meaning of s. 40A(3) of the Income-tax Act, 1961?”

25. As a result of the foregoing discussion, in our opinion, questions Nos. 1, 2 and 5 are questions of law in respect of which the Tribunal is required to state the case and refer the same to this court. Consequently, the reference application is partly allowed and the Income-tax Appellate Tribunal is directed to state the case on the following questions and refer the same to this court:

“1. Whether the Income-tax Appellate Tribunal had any material to arrive at its conclusion that diesel of Rs. 14,026 (18,000 litres) recorded on July 4, 1970, in the cash book and stock register of the applicant-firm represented the suppressed stock?

2. Whether the Income-tax Appellate Tribunal was, at any rate, justified in holding that the aforesaid sum of Rs. 14,026 was liable to be included in the total income of the applicant-firm as income from undisclosed sources?

3. Whether the Income-tax Appellate Tribunal was correct in holding that the purchases of diesel worth Rs. 14,026 recorded on July 4, 1970, was ‘an expenditure’ within the meaning of s. 40A(3) of the I.T Act, 1961’?”