S.V. Mehrotra, Accountant Member (As a Third Member) - On account of difference of opinion between the ld. Judicial Member and ld. Accountant Member of ITAT, Lucknow Benches, this matter has been referred to me by the Hon'ble President, ITAT for consideration and disposal u/s 255(4) of the Income-tax Act, 1961. The Hon'ble President has referred the following questions:

"Whether on the facts and circumstances of the case as well as in law, the Revenue 's ground nos. 3 to 6 be allowed or not?
19. Ground Nos. 3 to 6 reads as under:

3. That the ld. CIT (Appeals) has erred in law and on facts in deleting the addition of Rs. 10,78,71,656/- made on account of sundry creditors u/s 68 of the Income Tax Act, 1961 without appreciating the fact that these sundry creditors were not verifiable in absence of their whereabouts, complete postal address etc. ;

4. That the ld. CIT(Appeals) has erred in law and on facts in making an observation that making any addition u/s 68, the books of account of the assessee should have been rejected by the Assessing Officer u/s 145 of the Income Tax Act, 1961;

5. That the ld. CTT(Appeals) has erred in law and on facts in holding that once the AO has accepted the trading results including the purchases made during the year under consideration, the creditors cannot be treated as bogus/non existent in as much as that the goods to the extent of these amounts are accepted to be received, purchases and traded/manufactured by the appellant during the year;

6. That the CIT(Appeals) has erred in law and on facts in holding that the addition made the AO is legally incorrect and section 68 cannot be pressed to service for addition of business liabilities. "

1.1 I have considered the submissions of both the sides with reference to the orders passed by ld. J.M. and Ld. A.M. In order to properly appreciate the controversy, it is necessary to first of all consider the facts of the case and the findings recorded by Authorities below as well as separate findings of ld. J.M. and ld. A.M.

2. Brief facts of the case are that the assessee company, in the relevant assessment year, continued carrying on the business of export of finished leather and shoe upper and shoe as in the past by tanning the hide of goat and cow and converting it into finished leather and also by purchasing of finished leathers and converting it in manufacturing of shoe uppers and shoes, etc. Most of the finished leathers produced by the assessee had been exported to various countries. The assessee had filed its return of income declaring a net income of Rs. 35,77,635/- and the assessment was completed at a total income of Rs. 11,96,23,430/- as under:

	"After discussion, the income of the assessee is computed as under:
	Net Business income as per Computation of Income	36,27,635/ -
	ADD:

1.	On account of suppressed value of closing stock as discussed	48,51,384/ -
2.	On account of unexplained cash credit u/s 68 as discussed	10,18,71,656 -
3.	On account of interest on the advances made as discussed	12,14,949/ -
4.	On account of ESIC penalty as discussed	245/ -
5.	Out of Repair & Maintenance as discussed	3,42,813/ -
6.	Out of Vehicle Running & Maintenance as discussed	2,03,517/ -
7.	Out of Telephone expenses as discussed	73,381/ -
8.	Land Development expenses as discussed	8,53,752/ -
9.	Out of Foreign Travel as discussed	1,34,100/ -
10	Out of Power & Fuel as discussed	5,00,000/ -
		11,60,45,797/ -
	Total Business Income	11,96,73,432/ -
	Less: Deduction u/s 8UG as claimed	50,000/ -
	Total Income	11,96,23,432/ -
	Or Say	11,96,23,430/ -"

2.1 During the year under consideration, there was domestic sale of finished leathers only to the tune of Rs. 605.23 lakhs which was around 12% of the total turnover. All the shoe uppers and shoes purchased during the year were exported to other countries. The trading results of the assessee for the year under consideration, as compared to the last two assessment years, were as under:

	"Assessment Year	Total Sales	Gross Profit	G.P. Rate
	2003-04	6,329.90 lacs	427.14 lacs	6.75%
	2004-05	6,223.18 lacs	617 39 lacs	9 92%
	2005-06	5028.23 lacs	607.85 lacs	12.09%"

3. The only issue for consideration by me is with regard to the addition account of sundry creditors relating to raw hide supplier aggregating to F 10,78,71,656/-. Brief facts apropos this issue are that the assessee was required to furnish the details of sundry creditors aggregating to Rs. 13,13,54,090/-, which were as under:

"Chemical Supplier	Rs. 1,60,32,917/-
Misc. Supplier	Rs. 72,62,977/-
Upper Supplier	Rs. 1,86,540/-
Raw Hides Supplier	Rs. 10,78,71,656/-"

4. The AO has observed that assessee had provided complete names and postal addresses in respect of various sundry creditors other than raw hide/ leather suppliers for which assessee could not furnish the complete address and names of any of the supplier except the name of M/s Zaz Leather Compex Pvt. Ltd. against which the amount of Rs. 7,38,766/- had been shown as outstanding. He pointed out that in respect of other creditors the assessee had only given the details of the names of market of a particular city e.g. as under:

"1.	Malerkotla Marti	Various suppliers of Mandi	Rs. 5,48,206/ -
2.	Agra Mandi	-do-	Rs 84,33,227/ -
3	Amroha Mandi	-do-	Rs. 33,42,386/ -
4.	Faizabad Mandi	-do-	Rs. 95,46,033/ -"

5. The AO, therefore, pointed out that assessee had not been able to give even the complete list of the persons from whom the raw hides of goats was purchased and from whom the advance in the shape of credit had been taken by the assessee and to whom the huge amounts were payable. He, therefore, specifically required the assessee to give the details, name and complete postal address of the sundry creditor of raw hide. The assessee, in its reply dated 30/11/2007, submitted that these vendors had no regular shops or staff and amount outstanding was hardly Rs. 20,000/- each. Hence, keeping and maintaining all their postal addresses was unwarranted as payments were made to them on presentation of the slips issued to them by the assessee. The assessee further pointed out that all the purchases of raw hides during the year were fully vouched and verifiable and outstanding balance of Rs. 10 crore and odd of the previous year, relevant to the assessment year 2004-05, were paid during the year. The contention of the assessee was that there was a net increase in outstanding balance of Rs. 76,46,693.10 only during the year under consideration which was quite reasonable. The AO has pointed out that assessee had furnished the details of sundry creditors as on 31/03/2004 according to which the sundry creditors in respect of raw hide supplier were of Rs. 10,02,24,963/- as against sundry creditors for raw hide as on 31/03/2005 at Rs. 10,78,71,656/-. The AO pointed out that assessee had admitted that the entire outstanding balance of sundry creditors as on 31/03/2004 was repaid by the assessee during the current financial year and, as such, the entire amount of sundry creditors appearing in respect of raw hide suppliers was received during the year under consideration and no credit pertained to the previous year He, therefore, concluded that the entire amount was the credit of the year under consideration and the provisions of section 68 could be invoked in respect of such credits.

6. The assessee, vide its reply dated 17/12/2007 further, submitted that the identity, whereabouts and credit worthiness of these vendors was unquestioned. The assessee explained the trade practice in this regard and pointed out that almost all the vendors assemble at the time of weekly market i.e. mandi and the employees of the assessee company negotiate the rate and make selection of the hide on the spot and it is tried to make the payment on the spot. However, in case of purchase of larger quantity from such vendors, the payments were made in instalments, either at the time of next visit for purchases or they collect the payments from factory, which is made on presentation of slip for outstanding amount. According to the assessee, since these persons resided in the city or nearby places, where these weekly markets were held, the assessee purchased hides from them and recorded the outstanding balance in the name of that person against the mandies. It was, therefore, submitted that the question of creditworthiness of such vendors for supply of raw hide was undoubted and unquestioned. As per the assessee, it was due to confidence and trust of these vendors that they supplied raw hides of goats on credit as they were assured to get their payment as and when demanded.

6.1 The assessee further submitted that the purchase transaction in relation to raw hide of goat was quite different from the purchase of raw hide of buffalo and cow, as in both the cases there were regular dealers having permanent establishments, at different places and buyers of buffalo and cow hides are also spread all over the country.

6.2 Therefore, according to the assessee, the questioning of identify and creditworthiness and postal address of such vendors was unwarranted, as the assessee company had made almost 65% payments on the spot of purchase of hide and the balance amount was outstanding which had also been paid in the next visit or spreading to one-four months which was, practice in the trade of leather/raw hides. The assessee had also explained the reasons for not maintaining complete postal address of such vendors, vide its reply dated 17/12/2007.

7. The AO also countered the assessee's plea that the payments had been made within a span of one to four months by observing as under:

"During the assessment proceedings, on perusal of the books of account pertaining to these suppliers, it was observed that the assessee has shown a credit against the names of raw hide suppliers of goat skin of more than Rs. 1 lac and not Rs. 20,000/- as contended by the assessee in its reply. For example in the case of Md. Sharif the assessee made purchase worth Rs. 2,64,478/- on 08.07.2004 and made payment of cash only of Rs. 20,000/- on this date while remaining payments were made in instalment of Rs. 10,000 to Rs. 20.000/ from 25.07.04 to 17.02.2005. Similarly, in the case of Shri Banna of Pratapgarh, the assessee has made purchases of Rs. 1,30,240/- on 22.07.2004 by making payment of Rs. 18,000/- in cash while the balance amount has been paid in instalment ranging from 29th July, 2004 to 02.12.2004. Similarly, in the case of Shri Shaukhat of Pratapgarh, the assessee made purchase till 15th of July from 1st July amounting to Rs. 2,09,460/- against which the payments of only Rs. 62,460/- was made resulting in a credit of Rs. 1,47,000/-. Similar is the case of Irshad of Maharajganj from whom purchases were made of Rs. 2,35,224/- on 13.05.2004 by making a payment of only Rs. 15,000/- and the balance amount was paid in instalments starting from 20.05.2004 to 04.11.2004. In the case of Md. Anees, the assessee purchased raw hides worth Rs. 1,52,615/- by making payment of Rs. 18,615/-on 22.07.2004 and the balance amount was paid in instalment ranging from 12.08.2004 to 14.04.2005. These are some of the examples to suggest that its contention made earlier that all the payments were being made to such creditors within 1 to 4 months and no one was having credit of more than 20 months was not correct. "

7.1 From these facts, the AO concluded that assessee was introducing the names of fictitious persons as and when required and was itself introducing unaccounted money in its books of account against the names of various persons, whereabouts of which and identity in respect of which was neither verifiable nor available. He, accordingly, made an addition of Rs 10,78,71,656/-, inter-alia, observing that the assessee failed to give postal address, whereabouts, creditworthiness of vendors and also could not prove the genuineness of the transaction.

8. Before ld. CIT(A) the assessee had submitted as noted in para 22, as under:

"An amount of Rs. 10,78,71,656/- was outstanding and payable to around 600 to 700 vendors spread over 24 Mandies. Complete list of persons against whom amount is payable for supply of goat hide was furnished during the course of assessment proceedings. On being asked to furnish complete postal address together with to prove identity and creditworthiness of those vendors and a notice u/s 142(1) was issued to show cause as to why said outstanding of Rs. 10,78,71,656/- be treated as income within the meaning of sec. 41(1) of the I.T. Act, 1961. In response to above notice it was submitted that these outstanding pertains to balance payable to vendors and have been paid in subsequent visits in the succeeding assessment year. It was further submitted that amount of Rs. 3,63,81,768/-, Rs. 6,92,62,519/- and Rs. 10,02,24,963/- were outstanding in the assessment years 2002-03, 2003-04 and 2004-05 respectively. Thus, there has been an increase in outstanding for purchases of raw hide by Rs. 76,46,693/- in the year under consideration. Complete evidences for payment of outstanding amount to the vendors were submitted and explained during the course of assessment proceedings. Ld. AO keeping aside provisions of sec. 41(1) of the I.T. Act has invoked and applied sec. 68 and added Rs. 10,78,71,656/- being alleged unexplained cash credit by the appellant and simultaneously admitting the payment of outstanding amount and added to the income of the appellant without providing an opportunity for invoking and application of provisions of sec. 68 of the I.T. Act knowing fully well that aforesaid amount is nothing but liability against which purchases of goat raw hide only for which all relevant purchases slips, challan, transport receipt and other relevant documents confirming the purchases were filed. Ld. AO has arbitrarily and illegally applied provisions of I.T. Act and has converted liability against purchases into alleged unexplained cash credit."
8.1 The assessee had further submitted, as noted in para 24 of ld. CIT(A)'s as under:

"1.	No notice u/s 68 was ever served. The assessee was not given proper opportunity to explain that the aforesaid credit balances could not be treated as unexplained cash credits and could not be added to the income of the assessee u/s 68. Thus, the addition has been made in violation of the principles of natural justice.
2.	It is also relevant to reiterate that the assessment has been u/s 143(3). The accounts of the assessee have not been rejected and provisions of sec. 144 have not been invoked.
3.	The above credit balances could not be added to total income by invoking section 41(1) at all sec. 41(1) applies to cases where a deduction has been allowed for any year in respect of loss, expenditure or trading liability incurred by the assessee and subsequently the assessee has obtained in cash or kind or any other manner any amount in respect of such loss, expenditure or liability by way of remission or cessation thereof.
4.	The addition could not be made even u/s 68. This section applies to cases where 'any sum is found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the nature and source of thereof or the explanation offered by the assessee is in the opinion of the AO is not satisfactory.
5.	It is relevant to point out that sec. 68 has been introduced to check induction of unaccounted cash into the business in order to raise the corpus of the assessee. These provisions apply to receipts and not expenses, since expenses do not result in induction of cash into the business.
6.	The section does not apply to those credits which are the result of liability payable for expenses or purchases which form part of the Profit & Loss Account and hence amenable to scrutiny and examination by the AO about their genuineness and reasonableness.
7.	It is relevant to point out that the entire purchases, which have corresponding credit entries in the suppliers' accounts, are shown in the profit and loss account and the same have been allowed in the assessment. No part of the purchases has been disallowed. Once purchases have been allowed, no part of the unpaid price of such purchases can be treated as unexplained cash credit and added to the income of the assessee u/s 68.
8.	The said credit balances is a normal feature. Every year some part of the purchase price remains unpaid. The outstanding dues are paid in subsequent year, there is no unusual or exceptional liability appearing in the balance sheet during the year which is as evident from the fact that following credit balances were appearing at the year end in the different accounting year:

	Previous Year	Asst. Year	Outstanding creditors of supply of raw hide (Coat)
	2001-02	2002-03	363811768.00
	2002-03	2003-04	69262519.55
	2003-04	2004-05	100224963.21

	The records showing payment against such outstanding dues were produced before the ld. AO. The same are at pages 533 to 553 of paper book No. 2A.
9.	The ld. AO has added the entire credit balances standing in the names of suppliers of hide skins as unexplained cash credit. It would mean that there were no purchases at all. This would lead to absurd situation. If there are no purchases, there could be no sale, and no income.
10.	The contention of the ld. AO that the assessee has failed to give postal address, whereabouts. creditworthiness and genuineness of transactions, is wrong. The assessee has given the complete list of suppliers. The suppliers have their place of business in respective mandies. The post address of the suppliers is care of those mandis. It is no body's case that the suppliers are not available at those mandis or the letter sent to those suppliers care of the respective mandis were returned undelivered. No enquiries were made by the ld. AO about the existence of the suppliers. The assessee was never required to produce any of the suppliers. The ld. AO has proceeded only on assumption. "

8.2 Before ld. CIT(A), the assessee also furnished documents and information which were required by ld. CIT(A) to look into the facts and circumstances of the case. This included list of parties from whom purchases were made and copies of complete set of audited accounts. Thereafter, again ld. CIT(A) in para 26 to 28 has noted assessee's contentions, which are reproduced hereunder:

"26. In respect of above appeal we wish to state that during the course of assessment proceedings for the A.Y. 2006-07 ld. Dy. Commissioner of Income-tax 6, Kanpur we have filed confirmations from 1478 vendors of 11 Mandies confirming outstanding balance appearing as on 31.03.2006 as a part of verification/confirmation of sundry creditors (goat hide). Apart from the above there has been personal attendance of 105 vendors from different Mandies who have come before Dy. Commissioner of Income Tax-1 confirming the transaction and balance payable as on 31.3.2006. Most of the vendors were also raw hide supplier in the A.Y. 2005-06 (Appeal pending). We have highlighted the green Ink on whose names are common in the list of A. Y. 2005-06 and whose confirmations have been filed. Most the vendors are making supply since a long time. It is further submitted that we have highlighted only those suppliers from whom transactions were made in a big volume only those suppliers from whom transactions were made in a big volume only. Rest of the suppliers are also common in both the assessment year same could also be reconciled, if time is allowed. Detailed list of confirmation is enclosed. "

27. The names of person and the outstanding balance of the same person in respect of the year under appeal has been filed in the Annexure to this letter along with copy of assessment order for AY 2006-07. The AO has noted the fact of confirmation being filed in respect of A Y 2006-07 in para-11(iv) of the assessment order for the said year dated 29.12.2008 in the following manner:

"On 26.12.2008, the assessee company also produced number of Raw Goat Hide Supplier/Creditor, and have also filed their and other confirmations. Till date approximately, 1000 confirmatins from these creditors have already been filed. "

28. Finally, it has also been submitted vide letter dated 29.01.2009 before me that-

"In the matter of CIT v. Pancham Das Jain (2006) 156 Taxman 507 Hon'ble Allahabad High Court has held Tribunal was justified and deleting addition u/s 68.

'Further the Tribunal had recorded a categorical finding of fact based on appreciation of materials and evidence on record that the said amounts represented the purchases made by the assessee on credit and, therefore, the provisions of sec. 68 could not be attracted in the instant case. The view taken by the Tribunal was correct and, therefore, there was no question of, making addition u/s 68. (para-8)'.

'The goods in question having been purchased and the profit arising there from having been accepted by the Income-tax Officer, it appears difficult for us to visualize as to how the debits made by the assessee with regard to the said purchases and the simultaneous credits to the sellers' account could simultaneously be held by him to be cash credits'.

'The absence of proof regarding the existence of the two persons cannot, in our opinion, he confused with the question of genuineness of the purchases. If the goods purchased had been accepted by the department, it would not, in our opinion, be possible for the department to turn round and say that the debits appearing on account of these purchases in two wrong names'. "
9. Ld. CIT(A) deleted the addition for the following reasons:

"(a)	The admitted position in this case, on this issue, was that the credits were liabilities and dues relating to purchase/procurement of raw hide. Once these credits were accepted as debtors (creditors) against purchases of raw materials, some did not fall within the purview of unexplained credit within the meaning of section 68. Once the AO had accepted the trading results including the purchases made during the year, the credits could not be treated as bogus/not existent, in-as-much as that the goods to the extent of these amounts were accepted to be reasoned, purchased and credited/manufactured by the assessee during the year.
(b)	The AO had himself noted that these credits were part of current year only and perhaps he intended to hold that the purchased to the extent of Rs. 10,78,71,656/- were bogus. In that case, the addition could be made only in the trading account and gross profit if such purchases were found and treated as bogus. However, the trading results of the assessee during the year were accepted. The relevant books of account and supporting vouches/bills of manufacturing and trading account had been placed before AO and there was no infirmity or contradiction recorded by AO of such records.
(c)	Gross profit of the assessee had increased to 12.09% as compared to 9.92% in the preceding year. Therefore, there was no basis for doubling the hook results of the assessee without any enquiry and any adverse material/evidence of this issue. Under the circumstances, without any question on the purchases of the year, the part of the purchases which were appearing as payable/liabilities in the form of trade credits at the end of the year obviously could not be added to the income of the assessee. Once purchases were accepted these credits were to be taken as part of such purchases, then any addition for this purpose was improper unless the gross profit of such books of account were examined and rejected by the AO which was not the case.
(d)	The decision in the case of CIT v. Pancham Dass Jain, [2006] 156 Taxman 507 (All.) (HC) was totally applicable to the facts and circumstances to the case on this issue, where it was held as under:
	"We fully agree with the view taken by the Tribunal on this issue, inasmuch as, on the basis of the findings recorded by it that these two accounts represented purchase made by the respondent-assessee on credit and the purchases and sales having been accepted by the department, the question of addition of the aforesaid two amounts under section 68 of the Act would not be attracted on the purchases made on credit. "
(e)	Vide letter dated 30/01/2009 it was pointed out that large number of confirmations had been filed and accepted by AO in the assessment of succeeding assessment year. In fact, most of them were same suppliers/creditors, who had been doing business with the assessee in the past year under appeal and subsequently also under same business conditions/practice from year to year. Ld. CI'l'(A) further pointed out as under:
	"The name of such persons have been furnished before me and before AO also but however, without going into each and every entry and identification for this purpose, I would only take note of the assessment order for A Y 2006-0/ where it can be seen that, provided an opportunity to the appellant for verification of such purchases, the same has been carried out and most importantly there is no adverse/incriminating material showing that any entry or transaction of the appellant has been contrarily proved/found wrong and false. At this stage I would also rely on the decision in the case of K.S. Kannan Kunhi v. CIT [1969] 72 ITR 757 (Ker.), where it was held that "the explanation of the assessee should not be summarily rejected without further examination and where such examination is possible and not undertaken and the ITO adds to the assessment on the basis of the mere rejection of the explanation, the Court will set-aside the assessment."
(f)	He also referred to the decision in the case of Jaisa Ram v. CIT, 75 ITR wherein it has been observed that AO cannot reject the account books merely because the address of the purchasers in respect of cash transactions were not entered.
(g)	The AO had not questioned the correctness and the completeness of the books of account. The account books were duly added and auditor's report was also filed. The audit report prima facie did not show any infirmity and Column 13 of 3CD report giving quantum details of raw material, closing stock consumption etc. were also noted in the said report. Thus, proper records in respect of production consumption purchases etc. were available with the assessee which had been duly audited and there was no adverse finding available on them. Thus, the trading results did not require any reconsideration. Particularly when the gross profit had increased from 9.92% in the last year to 12.09% in the current year,
(h)	The proceedings of verification and examination of the credit balances had been carried out by AO with reference to Section 41 of the Act but the same had not been carried out further accepting that the conditions for applicability of sec. 41 did not exist. "

9.1 Ld. CIT(A) in para 36 concluded his findings as under:

36. "In view of discussion above, it is clear that the addition made by the AO is legally incorrect and sec. 68 cannot be pressed to service for addition of "business liabilities" as in this case, as decided by the Hon'ble Jurisdictional High Court in the case referred above. The addition is also not sustainable on facts and merits as there is no material and evidence pointing out any infirmity defect/incompleteness in the books of account of the appellant on this issue when the necessary details and documents of the business where available and produced before the AO. The books of account and particularly the trading results have not been questioned and there is no basis to reject the same. The explanations and supporting documents on this issue cannot be summarily rejected without any material and basis. The manufacturing trading results of the appellant are improved and higher during the year which does not provide any basis for any suspicion. As in the context of running and on "going business" the same facts in the assessment of the subsequent year, which supports explanations and business records of the appellant on this issue to been correct and valid are a positive evidence supporting the business practice and affairs of appellant from year to year. Therefore, no adverse view can be taken in respect of business records of the appellant and its books of account of the year under appeal, the part of which has been verified and accepted in the subsequent year leading to positive confirmation of the trade creditors rather than giving any reason for suspicion and doubt in respect of their genuineness. Taking note of all these facts and merits of the case and the legal position on this issue as discussed above, ground No. 1(b) of appeal is allowed. "

10. In the backdrop of above factual matrix, ld. A.M. confirmed the CIT(A)'s order, for the following reasons:

"(a)	AO doubted the creditors against the purchases and made the addition of the entire amount outstanding against the purchases, however, he did not point out any mistake in the books of account maintained by the assessee in regular course of business and also not doubted method of accounting employed regularly.
(b)	The AO did not point out any suppressed sale and inflated purchase. Gross profit rate which was at 12.09% in comparison to the gross profit rate of 9.92% in the preceding year had not been doubted.
(c)	The AO did not rebut the contention of assessee that liability against the purchase had been paid in the succeeding year.
(d)	The ld. CIT(A) categorically stated that during the assessment proceedings for the A.Y. 2006-07, the assessee filed the confirmation from 8,478 vendors of 11 mandies, so there was no occasion to doubt the supplier/creditor against the purchases when the trading results had not been disturbed
(e)	When the AO did not doubt the purchases and the gross profit rate, there was no occasion to doubt the corresponding characters of the purchases."

11. Ld. J.M. has summarized the submissions of both the parties as under:
"6. The submissions of the revenue were that

(i)	The assessee having failed to furnish details of persons, such as, names and addresses and amounts for whom the liability worth Rs. 10,78,71,656/- shown under the head "Raw hides supplier", was outstanding, the AO was justified in rejecting the assessee's claim.
(ii)	The liability was not on account of credit purchases;
(iii)	The AO was quite justified in considering this liability as on account of cash credits introduced by the assessee from its own pocket in the garb of credit purchases;
(iv)	The liability in question was not on account of credit purchases and, therefore, the AO was justified in considering the same as cash credits as envisaged in the provisions of section 68 of the Act; and
(v)	Since the assessee had failed to furnish the details as to the persons, their addresses and the amounts payable to each one of them, the AO was justified in considering the cash credits as ingenuine/unexplained and taxing the same by invoking the provisions of section 68 of the Act;

7. The gist of the assessee's stand is that

(i)	The purchases of goat skins have been made from the persons who have no permanent shops in Mandies, and, therefore, maintenance of records, such as, their names, quantum of purchases the amounts paid and payable is unwarranted;
(ii)	The outstanding is such liability is common in this line of business;
(iii)	The liability worth Rs. 10,78,71,656/- as on 31.03.2005 having been discharged in the next year and the revenue having accepted the same while completing the assessment for A. Y. 2006-07, addition on this count is illegal and bad in law;
(iv)	Since the liabilities on this count was less than Rs. 20,000/- in each case and were discharged/paid out on the basis of a slip issued by the assessee at the time of credit purchase there is no necessity or requirement for the assessee to maintain the records of those persons, or addresses or the quantum of purchases or amounts paid or amounts payable. According to the assessee, whosoever purchases the parchi gets the payment shown in the parchi and, therefore, requirement of such evidence by the Revenue was outside the scope of provisions of law. "

11.1 Ld. J.M. confirmed the addition for the following reasons:

"(a)	The assessee's obligation under sub-section (1) of section 145 of the Act is that he has to maintain its books of account either on cash basis or on mercantile basis regularly employed by him and while doing so has to follow the accounting standard (sub-section (2) of section 145 of the Act) as notified by the Central Government in the official gadget from time to lime. As per section 145(3) AO has power to reject the books of account if he is not satisfied about the correctness or completeness of the account of the assessee or if the method of accounting provided in sub-section (1) or accounting standard as envisaged under sub-section (2) have not been regularly followed by the assessee and in that situation the AO has power to make assessment u/s 144. Therefore, if assessee succeeds in substantiating its books of account with authenticated evidence, then the assessee's accounts can be said to be complete and correct unless and until the evidence supporting the entries in the books of account is found or is held to be manipulated, fabricated, false or bogus; or otherwise not. Therefore, if an assessee fails to establish the correctness and completeness of the entries in the books of account the revenue has power to deal with such an entry in accordance with the provisions of law;
(b)	As regards assessee 's claim that liabilities shown under the head "raw hide supplier", amounting to Rs. 10,78,71,656/- was on account of credit purchases, the initial onus lay on the assessee to furnish independent evidence to establish that what it is claiming, is the correct state of affairs and it could be established only by furnishing the complete details as to the parties from whom the purchase were made, amount of payment paid during the year and the amount payable (outstanding at the end of the year) and it is so because in that case, if revenue had any doubt with respect to correctness of the assessee's claim, it had the power to verify the same from the concerned party, but it is not the case here.
(c)	It is an admitted fact that the assessee has time and again claimed that maintaining such details was unwarranted, meaning thereby that the assessee had claimed that he was not under obligation or bound to maintain or explain such details as per law, which is not a correct understanding of law relating to maintenance of accounts by the assessee. Therefore, the AO was justified in rejecting the assessee's claim as assessee admitted that he was not maintaining any record with respect to details of persons, credit purchases, payments made to them during the year and balance outstanding at the end of the year in case of each such person
(d)	So far as assessee's claim that since it was issuing slips for credit purchases and payments were being made on the provision of slip, maintenance of record such as names and addresses of each such person was not required under the law, no such law is there which could absorb the assessee from obligation or maintaining such records and no such so called slip was brought to the notice of bench.
(e)	Ld. J. M. has discussed in detail the findings recorded by ld. CIT (A) from page 30 to 43 of his order in which primarily ld. J.M. has questioned the CIT(Appeals) observations that the admitted position in this case, on this issue, is that the credits are liabilities and dues relating to purchase/procurement of raw hide. He has pointed out that these observations are not correct because it was only the case of the assessee before the AO but the AO had not accepted it as no evidence in this regard had been furnished by the assessee either before the AO or before the CIT(A) or before the Tribunal and, therefore, the starting point of CIT(Appeals) findings itself was based on mistaken/distorted facts.
(f)	Ld. J.M. further pointed out that it is not correct that AO had accepted the trading results because he had not only disputed the valuation of closing stock for want of evidence but had made the addition also "meaning thereby" that observation of the CIT(A) and the AO having accepted the trading results including purchases was absolutely founded and unsustainable in law.
(g)	As regards reliance placed on the decision of Allahabad High Court in the case of CIT v. Puncham Dass Jain (2006) 156 Taxmann 507, Ld. JM observed that the said decision was not applicable to the facts of the case because in that case, the Revenue as well as the Tribunal had accepted the liabilities to be on account of credit purchases. But in the present case from the very beginning the liability in question was not on account of credit purchases and this stands supported as a result of failure of the assessee to establish its claim that the liability in question was on account of credit purchases. Ld. J.M. further observed that assessee failed to establish the genuineness of the liability as on 31/03/2005. Ld. J.M., in view of Hon'ble Jurisdictional High Court's decision, observed that there was no dispute in regard to the propositions of law that provisions of section 68 cannot be invoked when the liability in question was on account of business liability i.e. on account of trade transactions or other transactions relating to the assessee's business but that was not the fact in the present case. He observed that the very claim of the assessee as to the nature of liability is in dispute and, therefore, it was for the assessee to establish its claim.
(h)	As regards ld. CIT(A) 's observation in para 32 that in A. Y. 2006-07, AO had verified the correctness of these credits which were common with A. Y. 2005-06, ld. J.M. observed that since the assessee had not furnished such details during the course of assessment proceedings for A.Y. 2005-06, therefore, the assessee 's claim could not be accepted. "

12. Ld. DR referred to para 8.1 of ld. JM's order and pointed out that assessee should have maintained books of account in a manner so that the entries made therein were verifiable. Ld. DR referred to the written submissions dated 13th August, 2010 filed by ld. CIT(DR).

12.1 Ld. DR pointed out that assessee, vide reply dated 13/11/2007 stated that outstanding balance of each raw hide (goods) suppliers was ranging from Rs. 10,000/- to Rs. 20,000/- but this fact was specifically proved by AO to be not correct. The assessee was showing the purchases for goat skin ranging from Rs. 80/- to Rs. 140/- at its sweet will. He further submitted that assessee vide reply dated 17/12/2007 admitted that it was unable to furnish complete postal address of vendors. Ld. DR pointed out that purchases of the assessee were not verifiable as neither these were supported by any bills or vouchers issued by outside agencies nor persons from whom the purchase had been made were identifiable. The assessee could not furnish the complete postal address of any of the seller of the goat skin and neither could prove the genuineness of the transactions nor could establish the identity of said sellers. The assessee was not able to give even complete list of the persons from whom the raw hide of goat was purchased and from whom the advance in the shape of credit had been taken by the assessee and to whom the huge amounts were payable. Ld. DR relied on following judgments:

	(A) Grover Fabrics (India) (P.). Ltd. v. CIT [2011] 332 ITR 312/201 Taxman 85 (Mag.)/12 taxmann.com 413 (Punj & Har.)
	(B) CIT v. Smt. Annamkuty Jose [2008] 174 Taxman 328 (Ker);
	(C) Jai Prakash Sahu v. CIT [2008] 170 Taxman 301/[2007] 295 ITR 268 (All.);
	(D) Kachwala Gems v. Jt. CIT [2007] 288 ITR 10/158 Taxman 71 (SC)

12.2 Ld. DR further submitted that purchases shown in the credit account were actually made against cash payment and assessee failed to establish that the liability was a trade liability on account of credit purchase. In further submissions dated 19th August, 2010, Id. DR referred to the decision relied by assessee in the case of Visisth Chay Vyapar Ltd. v. ITO, decided by Delhi 'G' Bench in ITA No. 2835, 2838, 2836 & 2837/Del/2003 for A.Ys. 1996-97, 1998-99, 1999-2000 vide order dated 19th October, 2004 and pointed out that in the said decision the assessee had furnished details of distinctive number of shares and certificate of broker Mr. N.C Jain confirming the amount due from the assessee. But in the present case, the assessee could not give details of postal addresses of vendors and stated that company was not concerned about their identity. In sum and substance, it was submitted that the AO had met the criteria for invoking the provisions of the section 68.

12.3 Ld. DR further relied on third written submissions of ld. CIT(DR) dated 24th August, 2011, in which primarily ld. CIT(DR) has relied on the findings recorded by ld. J.M. ld. DR referred to the decision in the case of Grover Fabrics India (P.) Ltd. (supra) wherein it was held that there is no rule that addition on account of unexplained credit entries cannot be made along with trading addition. Ld. CIT(DR) also relied on the decision of CIT v. P. Mohanakala [2007] 291 ITR 278/161 Taxman 169, wherein Hon'ble Supreme Court held as per head note as under:

"The expression, "the assessee offers no explanation" means the assessee offers no proper, reasonable and acceptable explanation as regard the sums found credited in the books maintained by the assessee. "

12.4 Ld. DR referred to the findings of AO in para 10 & 11 to demonstrate that AO had clearly pointed out that the assessee's explanations were not plausible. He submitted that raw hide sellers are normally very small persons and could not give credit of such a large amount. He pointed out that assessee failed to establish the identity of the creditors, feasibility of transaction and also failed to produce bills and vouchers He, therefore, submitted that the ld. J.M.'s order be upheld.

13. Per contra, Ld. Counsel for the assessee submitted that assessee was purchasing raw hides, converting that into finished leather and exported that ld. Counsel submitted that ld. J.M. has recorded a finding that the liability in respect of raw hides was not a trade liability since no evidence was furnished by the assessee either before AO or ld. CIT(A) and this finding constitutes the foundation on which entire super-structure of disagreement by ld. J.M. stands. Ld. Counsel submitted that reading of assessment order for A.Y. 2005-06 particularly para 10 & 11 on page 7 & 8 of assessment order, would clearly establish that AO had not doubted about factum of the amount due to raw hide suppliers being trading liability. However, the addition had been made on account of alleged un-verifiability of raw hide credits.

13.1 Ld. Counsel pointed out that AO did not consider assessee's explanation that verification of the sundry creditors against raw hides was not readily possible due to the business practice for the purchase of raw hides from mandies particularly for the want of time, which had been explained by the assessee vide its reply dated 17/12/2007. Ld. Counsel pointed out that at pages 245 to 248 of paper book details of payment made in subsequent year, in respect of un-paid sundry creditors, is contained. Further, records of 20 vendors in respect of purchases of raw hide, payment made and un-paid amount is contained in paper book IIA at pages 533 to 553. Ld. Counsel further submitted that the Ld. J.M. has observed and recorded a finding that AO did not accept trading results since he had not only disputed valuation of closing stock for want of evidence but had made addition also in order to demolish findings of ld. CIT(A) that after having accepted trading results including purchases during the year, creditors cannot be treated as bogus.

13.2 Ld. Counsel pointed out that as regards the addition on account of valuation of closing stock ld. J.M. has agreed with the findings of ld. A.M. that deletion of addition on account of valuation of closing stock by ld. CIT(A) was justified. Ld. Counsel submitted that this factor vitiates the order of ld. J.M. since after having agreed with the deletion of aforesaid addition, the same could not be taken as a factor to justify the disagreement on account of addition of raw hide creditors.

13.3 Ld. Counsel further referred to para 9.26 of ld. J.M.'s order and pointed out that he has recorded a finding that AO had considered the factor that payment against purchase stood made by assessee during previous year itself and outstanding liability was introduction of assessee's own fund in garb of liability on account of credit purchases. In this regard ld. Counsel submitted that on reading of para 10 & 11 of assessment order at page 7 and 8 thereto, there is no finding by AO to the effect that payment was made during the previous year itself. On the contrary, the AO has impliedly accepted the contention of assessee that sundry creditors in respect of raw hides appearing on 01/04/2004 have already been repaid during previous year. This does not mean that credits for year under consideration for purchase of raw hides were paid in the previous year itself from unaccounted cash. ld. Counsel submitted that AO has nowhere recorded finding to the fact that assessee satisfied liability by own cash. As such this finding by ld. J.M. has again vitiated his order.

13.4 Ld. Counsel further pointed out that at fag end of time limitation for completing the assessment, the assessee was required to submit details of hide suppliers and, therefore, for want of time assessee could not supply the precise details of suppliers and vouchers who supplied raw hide. In this regard ld. Counsel pointed out that the notice u/s 142(1) was issued on 10/12/2007 requiring details of creditors including raw hide creditors. In compliance assessee supplied Mandi Wise details vide reply dated 17/12/2007 and the assessment order was passed on 24/12/2007. Resultantly, assessee was not in a position to supply precise details of raw hide suppliers for want of time and from this factor, finding recorded by ld. J.M. that the details furnished later on regarding discharge of those liabilities in next year were fabricated, does not stand the factual test.

13.5 Ld. Counsel further referred to para 27, para 29 & para 30 of ld. CIT(A), which he has reproduced in his written submissions also. In these paras ld. CIT(A) has referred to the verifications carried out in AY. 2006-07 by AO on this count. ld. Counsel, inter alia, submitted as under:

"Respondent further submits as under:

(a)	Identity of vendors is well established by the fact that petty vendors assessable at Mandi on Mandi day and pay charges to place their product in Mandi. Their names and addresses are recorded by Mandi committee who regulate this trade and settle dispute between buyers and vendors. That is why address of vendors have been shown careof Mandi and are made available as and when required.
(b)	In so far as creditworthiness of vendors are concerned, those vendors operate their business with small capital and carry on their business by collecting hides from butchers and mutton shop even from shops of remote places during the week by paying token amount and balance on credit and place them in Mandi for its sale. On receipt of payment from customers they make payment for purchases in instalments. It is their regular business and not a stray transaction. Therefore, their creditworthiness cannot be questioned. Further, it is creditworthiness and repute of assessee company which is evident of the fact that such large member of vendors do have faith in assessee company to supply hide on credit.
(c)	In so far as genuineness of transactions concerned, it is established by the fact that there had been purchase of hides from mandi through transporter's challan and respondent's own challan in evidence of entry of hides in its premises. "

13.6 Ld. Counsel further submitted that ld. J.M. has wrongly distinguished the decision,: inter alia, in the case of CIT v. Pancham Dass Jain [2006] 156 Taxman 507 (All.)

13.7 Ld. Counsel further submitted as under:

"(xv) In further support of the line of reasoning that credits in respect of suppliers of raw materials cannot be subject matter of addition u/s 68 of Income Tax Act, 1961, Respondent further place reliance on following juridical pronouncement."

In the matter of Dy. Commissioner of Income Tax v. Divine International - ITA No. 1995(Del) 2011 and ITA No. 1493(Del)2011 dated - September 30, 2011, Hon'ble Delhi Tribunal observed as under:

"This view has also been upheld by the Hon'ble Supreme Court in the case of CIT v. Smt. P.K. Noorjahan (1999) 237 ITR 570. The AO has to take into account the overall fads. Accordingly, in the case of the assessee the overall facts need to be considered. The amount outstanding being credit on account of purchases which have been exported by the assessee, it is not mandatory that in the absence of verification of the creditors, the same need to be added statutorily. "

"In the case of the assessee these creditors represent the outstanding amount on account of the purchases. There can be three alternative allegations against the assessee. Once can be that these credits represent the credit for earlier years. If that be the case, no addition can be made in this year u/s 68 of the Act. The second allegation can be that these credits represent the purchases for which payments have been made by the assessee during the year itself If this is so, the onus will be on the department to establish that assessee has made payment to these creditors.

This is not even the allegation of the AO, much less his case against the assessee. The third allegation can be that these credits do not represent the purchases which have been made by the assessee. The implication of this will be that the purchases debited in the trading account are not genuine to that extent and accordingly, that the trading account is not correct. However, on going through the assessment order, the CIT(A)'s order and the order passed by the ITAT in the earlier round, it is evident that the trading results have been accepted. Despite this, for the sake of analysis, if it is considered that the assessee has failed to prove the genuineness of the creditors and consequently, the purchases to that extent are not genuine, then the declared gross profit of Rs. 32,16,564/- will get further enhanced by Rs. 37,99,907/-i.e., a GP of Rs. 70,16,471/- on a total turnover of Rs. 2,51,55,930/- giving an exorbitant gross profit rate of 27.89%, which is not the case. It is also important to note that the assessee is in the business of exports and its entire income is exempt. There is, as such, no reason for the assessee to suppress the profit as its income. "

13.8 In regard to the reliance placed by ld. DR on the decision of Hon'ble Punjab & Haryana High Court in the case of Grover Fabrics India (P.) Ltd.'scase (supra) and P. Mohanakala's case (supra), ld Counsel submitted as under:

"In the context of reliance upon Judicial Pronouncement of Punjab and Haryana High Court respondent submits that in that case, there was addition on account of Trading Results after rejecting books of accounts and also addition in respect of credit entries from bogus entities. In the case of respondent, there is no addition on account of trading results and books of account stand accepted and there is addition on account of creditors for purchases of raw hides and not credit entries from bogus entities. As such reliance upon said judicial pronouncement by Id. Departmental Representative is altogether misplaced.

In the case of P. Mohanakala 291 ITR 278 (SC) Hon'ble Supreme Court has recorded finding as quoted by ld. AO in context of remittances received from foreign places by bank instruments and it was not case relating to creditors in respect of raw material. As such, reliance on this case by ld. DR is misplaced. "
14. I have considered the submissions of both the parties and have perused the record of the case keeping in view the orders passed by both the ld. Members. The issues, which primarily arise for consideration, are as under:

"1.	Whether AO had accepted the trading results or not?
2.	Whether purchases made by assessee were disputed by AO or not?
3.	Whether AO made the addition on account of non-verifiability of sundry creditors recording a finding that the payment for purchases were made by assessee 's own cash and only fictitious creditors were created?
4.	Whether in view of the decision of Hon'ble Allahabad High Court in the case of Pancham Dass Jain, the addition can be sustained or not?
5.	Whether the requirements of verification of sundry creditors were met at ld. CIT(A)'s level keeping in view the fact that in subsequent year 2006-07 the confirmations from the same creditors as existed in 2005-06 were obtained and verified?
6.	Whether assessee was provided sufficient opportunity to substantiate the sundry creditors by AO?"

14.2 Applicability of section 68 to sundry creditors (Trade creditors).
Section 68 reads as under:

"68 Where any sum is found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the sum so credited may be charged to income-tax as the income of the assessee of that previous year."

A bare perusal of section reveals that section 68 can be invoked in case of un-explained sundry creditors. However, a distinction has to be kept in mind while making addition u/s 68 in respect of loan creditors and trade creditors. Whereas trade creditors are linked to the trading results of assessee, loan creditors are not. Therefore, the reasonableness of explanation of assessee in regard to sundry creditors cannot be judged on the touchstone of the credibility of explanation to be judged with regard to loan creditors. The reason is simple. In case of loan creditors cash is received but in case of sundry creditors the assessee's claim is regarding purchases in normal course of business. In this regard I may also refer to Section 34 of the Evidence Act as per which books kept in normal course of business on day to day basis are relevant though not sufficient evidence on stand alonge basis. Therefore, if assessee was maintaining its books of account in accordance with the trade practice then the assessee's explanation regarding purchases has to be examined on the touchstone of prevalent trade practice.

14.2.1 There is no dispute that assessee company continued to carry on the business of export of finished leather and shoe upper and shoe as in the past by tanning the hide of goat and cow and converting it into finished leather and also by purchasing of finished leathers and converting it in manufacture of shoe uppers and shoes. Most of the finished leather produced by the assessee had been exported to various countries. The details of credit balances as appearing at the year end in different accounting years were as under:

FY.	A.Y.	Outstanding creditors of supply of raw hide (goat)
2001-02	2002-03	36381768.10
2002-03	2003-04	69262519.55
2003-04	2004-05	100224963.21

Thus, sundry creditors for raw hide purchases were of considerable amounts in earlier years also and, therefore, it was not a new feature of this year alone. The trading results shown by assessee for A.Y. 2005-06 were better than A.Y. 2004-05 in-as-much as the GP rate declared by assessee was 12.09% for assessment year 2005-06 as compared to 9.92% for AY. 2004-05. As regards the purchases effected by assessee, the contention of the assessee was that in respect of cow and buffalo hides, there were established dealers but the raw hides of goat was made from mandis from the small suppliers. The assessee vide its written submissions filed on 11/11/2013 has explained the modus operandi for purchase of raw goat hides as under:

"(a)	Market sits at mandi spot on a regular interval (Generally weekly);
(b)	Either the same or different Butchers/suppliers come to sell their raw goat hides on the market days;
(c)	Company's representative (s) go for making purchases on the market days to the Mandi Places and make purchases from Butchers/Suppliers who are present on the market day, after seeing age, quality and rate etc.;
(d)	Payment for current purchase is made in part and old balance, if any, is also paid depending upon various factors such as ensuring regular supply, loyalty, quality of hides, potential for future purchase and other business circumstances as may be incidental to normal trade practices. It is also added that amount not paid on the spot remains due to be paid in future either on the next mandi date or at the subsequent mandi or convenient dates and it is the factor of postponement of the payment which accounts for credit in respect of raw hide suppliers under consideration by Hon'ble Third Member;
(e)	The credit balance on any date consists of outstanding for the current purchase made on a particular day and sometimes part of old outstanding. However, entire purchase price is cleared in 3-5 months time in instalments;
(f)	The purchase of with holding part purchase consideration is to minimize the bargain power of the Butcher/Supplier and ensuring continuity of supplies by them. "

14.3 It is pertinent to observe at this stage that AO did not dispute the modus operandi of purchase of raw hide of goats from Mandi. He did not dispute that in normal course of trade practice the purchases were made from petty suppliers. However, after considering the modus operandi of assessee regarding purchase of raw hides of goat and the records maintained in that regard, the AO did not accept only the valuation of closing stock of raw hide on account of non-verifiability of rate of purchase of raw hide. However, purchase of raw hide per se was not disputed for obvious reasons viz. consumption, manufacture of leather and export being not disputed. This aspect needs proper elucidation because, as rightly pointed out by ld. Counsel, once this addition stands deleted, purchases could not be doubted. This finding has considerable bearing on issue to be decided. I, therefore, first proceed to examine this addition.

14.4 The AO pointed out that the assessee could not furnish the complete postal address of any of the seller of the goat skin nor could prove the genuineness of the transaction nor could establish, the identity of such sellers. The rates at which the raw hides of goods were purchased were also not verifiable as the assessee had no documents or supporting bills or vouchers to prove the rates at which these goat skins were being purchased. He further observed that from the details furnished during the assessment proceedings, it was observed that the assessee had been showing purchase rates for goat skin ranging from Rs. 80 to Rs. 140/- at its own sweet will. The assessee pointed out that the higher purchase price was paid in respect of goats which were healthy having good skin which were available during the period of festival season. However, as assessee did not give any documentary proof in support of its contention, the AO observed that the total purchases made by the assessee were not verifiable. He also pointed out that the challans produced during the assessment proceedings were in regard to the challans prepared and issued by the assessee itself on its own letter head without any supporting bill or voucher. He further referred to the tax audit report and pointed out that the auditor had also observed as under:

". . . We were unable to verify the quantitative details in absence of relevant records. The quantitative details, as per annexure have been furnished by the Directors and we have relied on the same for the purpose of our audit."

From these observations made by the auditors in respect of raw material as well as for finished goods, the AO concluded that the total purchases of the assessee and production thereof were not verifiable. In view of these facts, the AO made an addition of Rs. 48,51 384/- on account of suppressed value of the closing stock, inter-alia, observing as under:

"From the details furnished in Schedule-4, the assessee has shown the opening stock of raw material of Rs. 5,02,85,232/- which pertains to raw hides of goats. In terms of number as per Annexure-4 to the Tax Audit Report, the raw material of goat skin are 4.95.307 in number. As such, the average cost of raw hide shown in the opening stock is @ Rs. 101.52 per raw hide. As against this, the closing stock of rawhides have been shown at Rs. 6,25,23,278/- in Schedule-15 in respect of 6,63,659 pieces of raw hides as per Annexure-4 to the Tax Audit Report. This gives the average cost per goal skin appearing in the closing stock at Rs. 94.21. The assessee could not explain the reason for such a reduced rates of raw hides of goats at the end of the Financial Year as against the cost of raw hide appearing in the opening stock. This clearly shows that the assessee has been inflating its purchases and expenses by maneuvering and manipulating the figures pertaining to the purchases of raw hides. It has already been stated in the previous paras that the rates of raw hides were being disclosed at the rates which could suit the assessee and which are not verifiable from any independent agency. Hence, keeping in view all the facts and circumstances of the case and also in view of the submission made by the assessee during the assessment proceedings, the value of closing stock of raw hides of goals would be taken @ 101.52 in place of Rs. 94.21 as shown. By adopting this rate of goat skin as on 31.03.2005, the value of closing stock of goat skin as on 31.03.2005 would be Rs. 6, 73, 74,662/- in place of closing stock of goat skin shown at Rs. 6,25,23,278/. This shows that the assessee has suppressed the value of closing stock of raw hides of goats by an amount of Rs. 48,51,384/- which would be added to the total income of the assessee on account of suppressed value of the closing stock.
(Addition - Rs. 48,51,384/-)"

14.5 Thus, it is evident that AO had made this addition on account of purchases not being verifiable by taking the average cost per goat skin. This addition was assailed before ld. CIT(A) who deleted the same and the said deletion has been confirmed by both the Members. Therefore, the assessee's stand regarding purchase of raw hides stand vindicated

14.6 Now, the second aspect to be considered is whether trading results were accepted or not? The AO had made an addition of Rs. 10,78,71,656/- to the net business income as per computation of income submitted by the assessee. Thus, the AO has not disturbed the trading results returned by assessee but had only made a separate addition u/s 68 on account of non- verifiability of the creditors.

14.7 The third aspect to be considered is in regard to the AO's observations regarding assessee's own funds being introduced in the garb of sundry creditors.
14.8 In this regard the AO noticed that in the balance sheet assessee had shown sundry creditors in respect of raw hide suppliers to the extent of Rs. 10,78,71,656/-. When called upon to substantiate the liability towards sundry creditors, the assessee vide its letter dated 17/12/2007, after A explaining the modus operandi of purchases being effected by it as noted in para 8 & 9 of the assessment order, inter-alia, pointed out as under:

"We are unable to furnish and give complete postal addresses of those vendors they assemble at the weekly Mandi. Assessee has no concern of their where about but only purchase of raw hide. It is a concern of vendors to keep regular supply with the company, hence the assessee company is not concerned about their identity. Their payments are being made on presentation of supply slip issued by the company. As whole amount have been paid to these vendors within a span of 1 to 4 months or at the time of next visit question of adding such outstanding u/s 41(1) of the IT. Act, 1961 is unwarranted. This outstanding is normal outstanding and arrived at in the normal course of business and as per business practice. All the purchases are fully vouched and verifiable and properly recorded in the books of account."

14.9 After examining the assessee's contentions in para 10, the AO, inter- alia, observed that the assessee had been introducing the names of fictitious persons as and when required and was itself introducing unaccounted money in its books of account against the names and various persons, whereabouts of which and identity in support of which was neither verifiable nor available. Therefore, there was clear charge of AO that assessee had only shown fictitious creditors and actually met the liability by introducing its unaccounted money. Ld. Counsel's submissions to this extent are, therefore, not correct.

14.10 I find that there is not an iota of evidence on record to suggest that cash was actually introduced by the assessee in the garb of sundry creditors. The AO had primarily drawn a conclusion on account of non-verifiability of sundry creditors rejecting the assessee's explanation. Therefore, keeping in view the mandate of section 68 requiring AO to examine the reasonableness of assessee's explanation, it is necessary to examine as to how far his conclusion was correct. In this regard I may point out that if AO was able to establish that the creditors were completely bogus then his conclusion of introduction of unaccounted cash has to be accepted but mere non-verifiability of sundry creditors ipso facto cannot lead to the conclusion that sundry creditors were bogus. All the attending circumstances have to be examined, particularly the trade practice prevalent in that particular line of business, to come to a proper conclusion on the reasonableness of explanation. The section requires that the AO must be satisfied that the explanation offered by the assessee is genuine. However, it also provides that in the absence of a satisfactory explanation, the unexplained cash credit 'may' be charged to income tax. Therefore, the un-satisfactoriness of the explanation does not automatically result in deeming the amount credited in the books as income of the assessee If the facts clearly show that though assessee has not been able to establish the identify and creditworthiness of creditor and genuineness of transactions to the hilt but at the same time the existence of sundry creditors cannot be doubted considering the overall facts and circumstances of a case, particularly the prevalent trade practice, then it cannot be concluded that assessee has introduced cash in the garb of sundry creditors. There cannot be any quarrel with the proposition that onus is on assessee to establish the genuineness of transaction through credit purchases but for examining the genuineness of assessee's claim all attending factors and circumstances have to be examined. I may in this regard refer to the decision of Hon'ble Supreme Court in the case of P. Mohanakala (supra), wherein it was held as under:

". . . The expression, 'the assessee offers no explanation' means the assessee offers no proper, reasonable and acceptable explanation as regards the sums found credited in the books maintained by the assessee. "

Further, I may also refer to the decision of Hon'ble Supreme Court in the case of CIT v. Smt. P.K. Noorjahan [1999] 237 ITR 570/103 Taxman 382. In this case the assessee was unable to explain the source of investment for purchase of property attributed to the amount left by the assessee's stepfather, which could not be established by the assessee. Considering her age and the circumstances in which she was placed, the Tribunal held that the mere fact that she was unable to establish the source did not justify addition. The assumption that the only course for the Assessing Officer in such cases is to make an addition is incorrect as pointed out by the High Court, while endorsing the Tribunal's decision. Satisfaction in the opinion of the Assessing officer certainly involves an element of discretion in drawing an inference from the facts and circumstances of a particular case. It was this view of the High Court, which was endorsed by the Supreme Court, when it affirmed the decision of the High Court. In other words, the inference should rest upon the credibility of the explanation rather than the materiality of evidence.

14.11 Further, as regards verification of sundry creditors, I find that assessee in its written submission has pointed out that initially AO proposed the addition with reference to Section 41(1) but, subsequently realizing the fact that ingredients of sec. 41(1) were not applicable, made the addition u/s 68. The assessee in its written submissions has pointed out at page 6& 7, that at the fag end of time limitation for completing the assessment, assessee was required to submit the details of raw hide suppliers and for want of time assessee could not supply the precise details of suppliers and butchers who supplied raw hide since the notice u/s 142(1) requiring details of creditors including creditors in respect of raw hides was issued by AO on 10/12/2007. In compliance assessee supplied mandi wise details vide reply dated 17/12/2007 and the AO's order was passed on 24/12/2007. Thus, it cannot be disputed that assessee was not afforded sufficient opportunity to the assessee to furnish the details. In the backdrop of these facts, the findings recorded by ld. CIT(A) in para 32 & 33 assume significance which even take care of the verification part of sundry creditors. These are reproduced hereunder:

"32. I would further consider the submissions brought on record by ld. AR vide letter dated 30.01.2009 where large number of confirmations have been filed and accepted by AO in the assessment of succeeding assessment year. In fact, most of them are same suppliers/creditors who have been doing business with the appellant in the past year under appeal and subsequently also under same business conditions/practice from year to year. The name of such persons have been furnished before me and before AO also but however, without going into each and every entry and identification for this purpose, I would only take note of the assessment order for AY 2006-07 where it can be seen that, provided an opportunity to the appellant for verification of such purchases, the same has been carried out and most importantly there is no adverse/incriminating material showing that any entry or transaction of the appellant has been contrarily proved/found wrong and false. At this stage, I would also rely on the decision in the case of K.S. Kannann Kunhi v. CIT 72 ITR (Kerala), where it was held that "the explanation of the assessee should not be summarily rejected without further examination and where such examination is possible and not undertaken and the ITO adds to the assessment on the basis of the mere rejection of the explanation, the Court will set-aside the assessment".

33. It is seen that the AC) has applied the criteria of section 68 on these trading liabilities which in first place is legally incorrect and secondly no proceedings are taken to further verification of the creditors and fiction of section 68 has been utilized to hold those credits unverifiable and unexplained. From the submissions made before me in the paper book, it is seen that the appellant has given the names and place of business with the creditors and if purchases were required to be verified, the proceedings could have been directed towards such verification without taking help of deeming provisions in this behalf. As noted above, the appellant has furnished explanation and details on this issue and same cannot be rejected summarily by help of deeming provisions as far as purchases and such credits relating to such purchases are concerned. The decision in the case of Jessaram v. CIT, 75 ITR supports the observation more specifically applicable to this case where it was held that the "AO cannot reject the account books merely because the address of the purchasers in respect of cash transactions are not entered". This legal position is reiterated in the case of Durairaj v. CIT 83 ITR."

14.12 Thus, the verification part of the sundry creditors also stand duly met and, therefore, the findings of ld. J.M. contained in para 9.4 and 9.5 of his order cannot be sustained. At best it can be said that the matter should have been restored to the file of AO for examining the said details but the question referred to me in view of findings of both the members, does not contemplate so. I, therefore, refrain from making any observations to this effect. Moreover, since AO had examined the details in subsequent year and ld. CIT(A) himself examined the details and found that the purchases were made from same suppliers in A.Y. under consideration and subsequent year, therefore, substantial requirements of verification of sundry creditors also stood satisfied.

15. If ld. JM's view is accepted then it would lead to an anomalous situation inasmuch as the income of assessee will jump spirally to an astronomical figure which is unthinkable particularly when nexus between sundry creditors and purchases is clearly established. The sundry creditors have direct nexus with the trading results and, therefore, they cannot be examined on the same footing and criteria on which loans and deposits appearing in books are to be examined. The primary onus lay on assessee to establish the sundry creditors but if assessee fails to discharge that onus then considering the entire facts and circumstances of a case, a fair conclusion has to be drawn by AO to find out whether unexplained sundry creditors represent assessee's income or not. It would be travesty of justice if the addition on account of both trading results as well as sundry creditors is simultaneously sustained without telescoping the both because sundry creditors are directly related to trading results.

15.1 In view of these facts, first of all the decision of Hon'ble Jurisdictional High Court in the case of Pancham Dass Jain (supra) is to be considered, on which heavy reliance has been placed by ld. A.M. but ld. J.M. has merely stated that the said decision is not applicable to the facts of the case. In this case, the assessee was a dealer in iron goods and, agricultural, implements. The assessee filed its return of income for the AY. 1976-77. While framing the assessment of the assessee, the ITO asked the assessee to explain the nature and source of the cash deposits appearing in the books of account of the assessee in the name of two persons. As the assessee failed to give satisfactory explanation with regard to nature and source of aforesaid deposits, the ITO made addition u/s 68. On appeal, the assessee contended that the credits appearing in the name of the said two persons did not represent deposit of cash by them with the assessee and that they represented the value of goods supplied by them to the assessee and, therefore, the addition in question u/s 68 was not warranted. The assessee's contentions were accepted by ld. CIT(A) and the Tribunal which were confirmed by the Hon'ble Allahabad High Court observing as under:

8. "The submission is misconceived. The Tribunal has recorded a categorical finding of fact based on appreciation of materials and evidence on record that the Assessing Officer had accepted the purchases, sales as also the trading result disclosed by the respondent-assessee. It had recorded a finding that the aforesaid two amounts represented the purchases made by the assessee on credit and, therefore, the provisions of section 68 of the Act could not be attracted in the present case. We fully agree with the view taken by the Tribunal on this issue, inasmuch as, on the basis of the findings recorded by it that these two amounts represented purchases made by the respondent-assessee on credit and the purchases and sales having been accepted .by the department, the question of addition of the aforesaid two amounts u/s 68 of the Act did not arise inasmuch as the provisions of section 68 of the Act would not be attracted on the purchases made on credit."

15.2 Keeping in view the fact that in the present case also there being no dispute as regards the purchases and the trading results having been accepted, in my opinion, the decision of Hon'ble Allahabad High Court is squarely applicable to the facts of the case. The decision relied upon by ld. DR in the case of Smt. Annam-kuty Jose (supra) holding that the principles contained in section 68 as well as in section 69C are squarely applicable to sundry creditors has been rendered on the facts obtaining in the said case and has no application to the present case.

15.3 Now, I will refer to various case laws relied upon by ld. CIT(DR), to examine the applicability of them to the facts of the present case:
(A) Grover Fabrics (India) (P.) Ltd.'s (supra)

"The assessee derived income from trading in handloom products. The Assessing Officer did not accept the trading results reflected in the books of account and accordingly, made an addition to the declared income. Apart from making the addition, the AO made a further addition in respect of credit entries from bogus entities. The Commissioner (Appeals) deleted the trading addition after giving the benefit of telescoping against the addition in respect of unexplained credit entries. On further appeal by both parties, the Tribunal remanded the matter to the Assessing Officer observing that there was contradiction in the documents submitted by the assessee. On appeal:

Held, dismissing the appeal, that unexplained credit entries may or may not have a nexus with the trading results, as assessed. The Commissioner (Appeals) deleted the additions in respect of trading results after giving the benefit of telescoping. It would, thus, be a question of fact in each case whether the addition on account unexplained credit entries was justified, in spite of the addition made to the declared trading results. No substantial question of law arose. "

Thus, the entire controversy revolved around the fact whether trading additions could be telescoped against the additions made for unexplained cash credits or not. Hon'ble P&H High Court held that it would depend on facts of each case as to whether nexus with sundry creditors had been established or not. This decision was rendered on entirely different set of facts where AO had recorded a finding that the credit entries were from bogus entities. In the present case, there is no finding by AO that the sundry creditors were bogus. Here AO had only drawn an adverse conclusion only on account of non-verifiability of sundry creditors but no finding was given that creditors were bogus. On the contrary the AO had accepted assessee's contention regarding payment of opening creditors during the year. Therefore, this decision is of little assistance to the Department.

(B) Smt. Annamkuty Jose's case (supra)
In this case main issue before Hon'ble Kerala High Court was as to on whom the onus to prove the sundry creditors shown in the books lay - whether on assessee or department. It was held that burden lies on assessee to establish the genuineness of sundry creditors, with which there cannot be any dispute, and not on AO to prove that sundry credits represent income of assessee. Hon'ble High Court observed as under:

"In the present case AO has not disputed the prevalent trade practice of credit purchases in this line of business. Therefore, this decision is of little assistance to Department."

(C) Jai Prakash Sahu's case (supra)

In this case it was, inter-alia, held that mere non-mentioning of section 145 could not vitiate the proceedings because criteria set out in section had been met - In the present case addition u/s 68 was not disputed on the ground of wrong mentioning of section but on the ground that proper opportunity was not afforded to assessee to establish the genuineness of sundry credits once the AO did not proceed further with the addition u/s 41.
Therefore, this decision has no application to the facts of present case.
(D) Kachwala Gems, case (supra)

"11. It is well-settled that in a best judgment assessment, there is always a certain degree of guess work. No doubt the authorities concerned should try to make an honest and fair estimate of the income even in a best judgment assessment, and should not act totally arbitrarily, but there is necessarily some amount of guess work involved in a best judgment assessment, and it is the assessee himself who is to blame as he did not submit proper accounts. In our opinion, there was no arbitrariness in the present case on the part of the income-tax authorities."

15.4 In my opinion this decision primarily supports the assessee's case that income cannot be determined at astronomical figures unless assessee's explanation has been proved to be false.

15.5 In view of above discussion, I agree with the view taken by Ld. Accountant Member in view of the decision of Hon'ble Jurisdictional High Court inPancham Dass Jain's case (supra)

16. The matter will now go back to the Division Bench for passing the order in accordance with majority view.

ORDER UNDER SECTION 255(4) OF THE INCOME TAX ACT, 1961

Sunil Kumar Yadav, Judicial Member - Pursuant to the order of the Third Member relating to addition of Rs. 10,78,71,656/- made on account of sundry creditors under section 68 of the Income tax Act, 1961 (hereinafter called in short "the Act"), the majority View of the Tribunal is that the aforesaid addition made under section 68 of the Act is not sustainable in the eyes of law and, therefore, the order of the ld. CIT(A) deleting the aforesaid addition is confirmed.

2. Accordingly, the appeal of the Revenue on this issue stands dismissed.