Ajit K. Sengupta, J. - (1.) In this reference under Section 256(2) of the Income-tax Act, 1961, the following questions of law have been referred by the Appellate Tribunal for our opinion : "1. Whether the reduction of the gross profit rate from 30% as determined by the Assessing Officer to 7 per cent. by the Tribunal is based on any relevant material and/or otherwise perverse ?
(2.) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in not confirming the gross profit rate of 30 per cent. as determined by the Assessing Officer ?" 2. The facts as found by the Tribunal are as follows : The assessment year involved is 1986-87. The assessee is carrying on business of oils of various descriptions and grades. On May 5, 1987, in the course of a search in the premises of the assessee certain materials were found which led the Income-tax Officer in the course of the assessment of the assessee for the assessment year 1986-87 to a conclusion that the purchases shown by the assessee in the books of account during the year of account were inflated and bogus purchases were debited to suppress profits. The assessee was called upon to prove the genuineness of the purchases. The Assessing Officer also issued notices to various parties who had purportedly sold goods to the assessee. Of them Imperial Oil Co., and Bengal Enterprises were the main parties. One Shri Ram Sevak Sukla appeared on behalf of Imperial Oil Co., as its sole proprietor and confessed in effect that the sales alleged to have been made by him to the assessee were not genuine and that the sales were bogus transactions. He was paid a sum of Rs. 15 per drum of oil for fabricating such sales. Thus, the Income-tax Officer concluded that the assessee has inflated the purchases and reduced the profit from oil business. The gross profit of Rs. 1,41,610 disclosed by the assessee in the books on a turnover of Rs. 26,78,388 was disbelieved. The Officer rejected the book results and estimated the gross profit at 30 per cent. of the turnover as against the rate of gross profit at 5.2 per cent. shown by the assessee. The difference between the book results and the estimates called for an addition of Rs. 6,61,908.
(3.) In the appeal by the assessee, the Commissioner of Income-tax (Appeals), however, reduced the gross profit rate from 30 per cent. to 10 per cent. The said order of the Commissioner of Income-tax (Appeals) was challenged both by the assessee and the Revenue in second appeals before the Tribunal. The Tribunal on hearing the parties came to the conclusion that the Income-tax Officer was not right in accepting the oral statement of Shri Sukla when the documents produced by the assessee in evidence of the purchases proved the genuineness of the same. The Tribunal also referred to the affidavit dated February 16, 1988, affirmed by Shri Sukla where he testified that his sales of lubricant oils to the assessee were correct and genuine and payments for such sales were received by account payee cheques. The Tribunal took the view that the Income-tax Officer erred in preferring oral evidence to documentary evidence to rely upon for the purpose of making the addition. The Tribunal further held that by reason only of the fact that one person from whom the assessee claims to have effected purchases had deposed that the transactions were not genuine, the Officer could not in fairness disbelieve all the purchases and make an arbitrary addition on estimates at a gross profit as high as 30 per cent. as against 5.2 per cent. disclosed by the assessee. The Tribunal also compared the assessment for the earlier years and the relative gross profit rates which are as under : JUDGEMENT_103_ITR210_1994Html1.htm;