S.V. MEHROTRA, ACCOUNTANT MEMBER (AS A THIRD MEMBER)
I.S. VERMA AND SUNIL KUMAR YADAV, JUDICIAL MEMBER 
N.K. SAINI AND A.K. GARODIA, ACCOUNTANT MEMBER

Manoj Kumar Gupta, CIT (DR) for the Appellant. 
R.R. Jain, Adv. and R.K. Shukla for the Respondent.

ORDER

N.K. Saini, Accountant Member - The appeal by the department and the Cross Objection by the assessee are directed against the order dated 30/01/2009 of the CIT(A)-I, Kanpur.

2. First we will deal with the departmental appeal. The first issue vide ground Nos. 1 and 2 of this appeal relates to the deletion of addition of Rs. 48,51,384/- made by the Assessing Officer on account of suppressed value of closing stock.
3. The facts related to this issue, in brief, are that the assessee was engaged in the business of export of finished goods like shoe etc. and filed the return of income on 31/10/2005 declaring an income of Rs. 35,77,635/-. However, the assessment was completed at an income of Rs. 11,96,23,430/-. The Assessing Officer made the addition of Rs. 48,51,384/- on account of suppression value of closing stock. The Assessing Officer, while making the addition narrated the facts in para 5 of the assessment order which read as under:

'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 the goats were purchased are also not verifiable as the assessee does not have any documents or supporting bills or vouchers to prove the rates at which these goat skin are being purchased. From the details furnished during the assessment proceedings, it was observed that the assessee has been showing purchase rates for goat skin ranging from Rs. 80/- to Rs. 140/- at its own sweet will. When confronted with this fact and required to explain the reasons for such a vast difference in the purchase of raw hide skin, the assessee only submitted that the higher purchase price was paid in respect of goats which were healthy having good skin which are available during the period of festival season. However, the assessee could not give any documentary proof in support of its contentions. In view of this, the total purchases made by the assessee is not verifiable. It will not be out of place to mention here that the challans produced during the assessment proceedings were in fact the challans prepared and issued by the assessee itself in its own letterheads without any supporting bill or voucher. It is worth mentioning here and to bring it on record that in the Tax Audit Report and in Form 3CD; the auditors of the assessee in column-28(b) have clearly mentioned as under

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

3.1 The Assessing Officer made the impugned addition by 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 raw hides 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 goat 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 purchase and expenses by manoeuvring 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 stock of raw hides of goats would be taken@ 101.52 in place of Rs.94.21 as shown. By adopting this rate of goat skin as on 31.3.2005, the value of closing stock of goat skin as on 31.3.2005 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."

4. The assessee carried the matter to the learned CIT(A). The submissions of the assessee are mentioned by the learned CIT(A) in para 9 of the impugned order which are reproduced verbatim as under:

"It has been submitted by the appellant in the statement of fact that–

(1)	Appellant had purchased 33,08,163 No. of pieces of raw hide goat, 30,26,137 No. of pieces tanned and converted in finished leather, 29,56,584 No. of pieces of raw hide goat were sold/exported/consumed during the year. It is relevant to highlight that the ld. Assessing Officer has not disputed the value and quantities of purchases, consumption, sales or the opening closing stocks. All these figures are admitted. The dispute is only with regard to the value of closing stock. It is relevant to point out that the quantities of closing stocks have not been disputed. As a matter of fact the addition is based on the quantities of stocks as per books of the assessee.
(2)	The assessment has been completed u/s 143(3). The accounts of the assessee have not been rejected and provisions of section 144 have not been invoked.
(3)	While making the addition, the ld. AO has committed grave error in not appreciating the fundamental principle of accounting i.e. the closing stock does not represent any independent transactions.
(4)	The ld. Assessing Officer has committed another fundamental error by not appreciating that the assessee has followed FIFO (first in first out method) for valuation of stocks. This mention has been followed consistently by the assessee year after year and there has been no change in this method of valuation. There is no allegation to that effect in the assessment order.
(5)	The statement showing the valuation of closing stock as per the method applied by the assessee is at pages 9 to 10 of the Paper Book No. 1.
(6)	From the perusal of the above statement it can be seen that the closing stocks represent the purchases made during the months of January to March 2005 and accordingly the cost of purchases made during the said period represent the value of closing stock.
(7)	If the value of closing stock is enhanced, as done by the ld. AO, it would automatically lead to the conclusion that the cost of purchases during the said period was also correspondingly higher and accordingly, the value of purchases would require corresponding enhancement and if that was done, the figure of profit/income would have remained unchanged. There could be no addition in the income at all.
(8)	The improvement in GP rate during the year despite decline in sales is an indication of better management. The decline in the average cost of goal skin further indicates that there has been better purchase management. This better management has obviously resulted in higher profits income during the year as indicated by improved GP rate. The assessee has thus offered higher income to tax by the improvement in G-rates. A chart showing comparative turnover, gross profit and gross profit rate for the year and immediate preceding two years is enclosed. (Page Nos. 211 to 212 of Paper Book No 1) There has been 12.09% of gross profit during the year has against 9.92% in the immediate preceding year. Thus their has been an increase in GP rate by 2.17%.
(9)	It is very strange that improved GP rate and consequential higher profits and assessable income, instead of being appreciated, is being used as a tool to Penalise the assessee.
(10)	The allegations that the purchases are not verifiable as they are not supported by any bills/vouchers issued by outside agencies and purchase prices have varied from Rs. 80/- to Rs.140/- per piece, are founded on misappreciation of the facts, records and circumstances in which the assessee is operating.
(11)	The entire system of purchases and preparation of bills/vouchers and the genuineness of the purchases including the value thereof, was explained in detail by the assessee vide letters dated 1.11.2007, 30.11.2007 explaining in the method adopted for making purchases is enclosed (page Nos. 213 to 217).
(12)	The relevant records i.e. challans with supporting of few purchases which were produced for verification of ld. AO are at Page Nos. 1 to 502 of the Paper Book Nos. 2 & 2A.
(13)	As a matter of fact, the purchases in terms of quantities have been accepted by the ld. AD as regards value of such purchases, it is submitted that the very fact that the average cost of purchases during the year is substantially lower than the purchases made in the preceding years, shows that there is no room for suspicion. The ld. AO has acted merely on suspicion without any basis.
(14)	As regards the observation made in the Tax Audit Report, it is submitted that the said observation pertains to quantitative details of India as work-in-progress in the production line only. ld. AO has not appreciated the fact that the rates of goal rate waivers almost every day and differ from mandi to mandi and festival season and non-festival season. Further a chart showing daily rates on which raw hides were purchased during the financial year 2004-05 is enclosed and appearing on page Nos. 503 to 531 of Paper Book No. 2A. Detail of daily purchases vendor-wise is also enclosed Page Nos. 505 to 518 of Paper Book No. 2A. As already stated, the quantities of purchases, stocks, consumption etc. are not disputed. The quantities have been accepted by the ld. AO hence the observation of the Auditors has no relevance and cannot be a ground to make the addition in question.
(15)	The relevant record in respect of making purchases from mandies i.e. challan, Tanzim Slip, Paltai, Bilty/Freight, travelling tickets, details of expenses incurred by fooding, conveyance and allowances and other expenses. Gate pass which were produced for verification by the ld. AD during the course of assessment proceedings are at Page Nos.1 to 502 of the Paper Book Nos. 2&2A"

4.1 The learned CIT(A), after considering the submissions of the assessee, observed that that the Assessing Officer adopted average rate of purchase of raw material during the year and had taken the average cost of opening stock i.e. Rs. 101.52 per raw hide for the purpose of valuation of the closing stock which is Rs.94.21 as per books of the assessee. The learned CIT(A) pointed out that the assessee had explained to the Assessing Officer the working of the valuation of the closing stock and furnished the purchase bills. The learned CIT(A) had reproduced the submissions of the assessee before the Assessing Officer in para 11 of the impugned order. For the cost of repetition the same is not reproduced herein. It has been stated in the said submissions that the cost of opening stock cannot be taken as cost of the closing stock and that the assessee was following FIFO method. The learned CIT(A) observed that the assessee was dealing in raw hides/skin which is an organic produce thereby each piece is liable to be different than the other one, unlike manufactured products, such organic items of raw material do not confirm the size, specification, weight and quality to each other. He was of the opinion that there was no uniformity in the items of raw material so, it was not proper to apply the average cost for valuation. He also pointed out that the Assessing Officer had revalued the closing stock on average cost method without revaluing opening stock figure on the average cost method. This was not in accordance with the principles of ascertaining correct profits of the year. Reference was made to the judgment of Bombay High Court in the case of Kantilal Chandulal Dharia v. CIT [1976] 104 ITR 487 wherein it has been held that opening and closing stock of a business are both undervalued, the real profits of the company of particular year cannot be ascertained by merely raising the valuation of the closing stock without taking into consideration, the similar under-valuation of the opening stock. He, therefore, was of the view that the addition made by the Assessing Officer on account of suppressed valuation of closing stock was not supported on facts or as per law. He accordingly deleted the addition made by the Assessing Officer. Now the department is in appeal.

5. The Learned DR strongly supported the order of the Assessing Officer and further submitted that the learned CIT(A), while deleting the addition, has not given any cogent reason so the order passed by him is a non-speaking order.

6. The learned counsel for the assessee, in his rival submissions, strongly supported the impugned order of the learned CIT(A) and submitted that the findings of the Assessing Officer were wrong because he valued the closing stock on the basis of the valuation of opening stock in spite of the facts that the assessee was following FIFO method of accounting. It was contended that the Assessing Officer had not disputed the quantity of purchase, stock and consumption, so there was no reason to disturb the valuation of the closing stock which was worked out by the assessee on the basis of actual cost. Therefore, the learned CIT(A) was justified in deleting the addition made by the Assessing Officer.

7. We have considered the rival submissions and carefully gone through the materials available on the record. In the present case, it is noticed that the Assessing Officer applied the average cost of opening cost while valuing the closing stock. That method adopted by the Assessing Officer was not correct method particularly when the claim of the assessee was that it was following FIFO method of accounting i.e. First In First Out. In our opinion, right course for the Assessing Officer was to work out the value of closing stock on the basis of last purchase which, according to the assessee remained in the closing stock but that step has not been taken by the Assessing Officer. At the same time the learned CIT(A) merely accepted the submissions of the assessee and deleted the addition made by the Assessing Officer. He simply stated that the addition made by the Assessing Officer was not supported on facts, however he did not comment as to whether the method adopted by the assessee for valuation of the closing stock i.e. FIFO method was actually followed or not. We, therefore, considering the totality of the facts, deem it proper to set aside this issue back to the file of the Assessing Officer for readjudication in accordance with law after providing due and reasonable opportunity of being heard to the assessee.

8. The second issue vide ground Nos. 3 to 6 relates to the deletion of addition of Rs. 10,78,71,656/- made by the Assessing Officer on account of sundry creditors by invoking the provisions of section 68 of the I.T. Act, 1961.

9. The facts related to this issue, in brief, are that during the assessment proceedings the Assessing Officer called the details of sundry creditors with supporting verification/confirmation. The detail furnished by the assessee was 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

9.1 The assessee furnished complete name and postal address of all the creditors except the sundry creditors relating to raw hides. According to the Assessing Officer, the assessee could not furnish complete address and name of any of the supplier except the name of M/s. Zaz Leather Complex Private Limited against which an amount of Rs.7,38,766/- had been shown as outstanding. The said company was closely related with the assessee and was covered within the provisions of section 40A(2)(b) of the Act. The Assessing Officer pointed out that the assessee was not able to give the complete list of the sundry creditors relating to the transactions from whom the raw hides 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. The submissions of the assessee was that the vendors have no regular shops or stock and amount outstanding was hardly Rs.20,000/- each. Hence, keeping of their postal address, was unwarranted as payments were made to them on presentation of the slip issued by the assessee. It was contended that all the purchases were fully vouched and verifiable and that the outstanding balance of over Rs.10 crore of the previous year relevant to assessment year 2004-05 were paid during the year. The contention of the assessee was that there was a net increase in the outstanding balance of Rs.76,46,693.10 only during the year under consideration which was quite reasonable. The assessee also furnished the details of sundry creditors as on 31/3/2004 which were at Rs.10,02,24,963/- as against Rs.10,78,71,656/- on 31/3/2005. Since the assessee had admitted that the entire outstanding balance as on 31/03/2004 was repaid during the year under consideration, the Assessing Officer considered the entire amount as the credit of the year under consideration and invoked the provisions of section 68 of the Act. According to the Assessing Officer none of the vendors or creditors appearing against the purchase of raw hides was verifiable and the contentions/arguments as given by the assessee during the course of assessment proceedings, were not reliable and quite away from the reality. He further observed that the assessee failed to give postal address, whereabouts, creditworthiness of the creditors and also could not prove the genuineness of the transactions. As such, the credit appearing in the balance sheet amounting to Rs. 10,78,71,656/- was treated as unexplained cash credit entries by the assessee during the year under consideration. Accordingly, the addition of Rs.10,78,71,656/- was made.

10. The assessee carried the matter to the learned CIT(A) and submitted that the amounts outstanding was payable to around 600 to 700 vendors spread over 24 Mandis and that complete addresses of persons against whom amount was payable for supply of goat raw hide was furnished during the course of assessment proceedings and the payment was made in the succeeding year. It was contended that complete evidence for payment of outstanding amount to the vendors were submitted and explained during the course of assessment proceedings. However, the Assessing Officer, keeping aside the provisions of section 41(1) of the Act, had invoked and applied section 68 and made the addition without providing an opportunity for invoking and applying the provisions of section 68 of the Act, knowing fully well that the amount in question was nothing but liability against the purchase of goat raw hide only for which all relevant purchase slips, challans, transport receipts and other relevant documents, confirming the purchase, were filed. The submissions made by the assessee had been reproduced by the learned CIT(A) in para 24 of the impugned order which read as under:

"24. The appellant has submitted vide written submission in respect of other credit balances added u/s 68 of the I.T. Act as follows:-

(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 made u/s 143(3). The accounts of the assessee have not been rejected and provisions of section 144 have not been invoked.
(3)	The above credit balances could not be added to total income by invoking section 41(1) at all. Section 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 section 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 & 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 (goat)
	2001-02	2002-03	36381768.00
	2002-03	2003-04	69262519.55
	2003-04	2004-05	100224963.21

	The records showing payments 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 mandis. The post address of the suppliers is care of those mandis. It is nobody'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."

10.1 The assessee also submitted to the learned CIT(A) as under:

"In respect of above appeal we wish to state that during the course of assessment proceeding for the assessment year 2006-07 before ld. Dy. Commissioner of Income-tax-6, Kanpur we have filed confirmations from 1478 vendors of 11 Mandies confirming outstanding balance appearing as on 31.3.2006 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-I confirming the transaction and balance payable as on 31.3.2006. Most of the vendors were also raw hide supplier in the assessment year 2005-06 (Appeal pending). We have highlighted the green Ink on whose names are common in the list of assessment year 2005-06 and whose confirmations have been filed. Most of the vendors are making supply since a long time. It is further submitted mat we have highlighted 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."

10.2 The reliance was placed on the judgment of Hon'ble Allahabad High Court in the case of CIT v. Pancham Dass Jain [2006] 156 Taxman 507. It was contended that the goods in question having been purchased and the profit arising therefrom having been accepted by the Assessing Officer, so it was difficult to visualize as to how the debits made by the assessee with regard to the said purchase and the simultaneous credit to the sellers' account could simultaneously be held by him to be cash credit.

10.3 The learned CIT(A), after considering the submissions of the assessee, observed that the credit balance appearing in the books of the assessee and added by the Assessing Officer u/s 68 related to purchase of the raw hide. He was of the view that once the credits were accepted as payables against purchase of raw material, same did not fall within the purview of unexplained credit within the meaning of section 68 and once the Assessing Officer had accepted the trading results including the purchases made during the year, those credits could not be treated as bogus/non-existent inasmuch as that the goods to the extent of these amounts were accepted to be received, purchased and traded/manufactured by the assessee during the year. According to the learned CIT(A), the Assessing Officer himself had noted that those credits were part of current year only but intended to hold that the purchases 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 had been accepted and no infirmity was found in the books of account, supporting vouchers/bills of manufacturing and trading account. The learned CIT(A) also pointed out that the gross profit rate of the assessee had increased to 12.09% as compared to 9.92% in the preceding year, so there was no basis for doubting the book results without any enquiry and any adverse material/evidence on this issue. The learned CIT(A) was of the view that part of the purchases which were appearing as payables/liabilities in the form of trade creditors at the end of the year, could not be added to the income of the assessee and that once purchases were accepted those credits were taken as part of such purchases, then any addition for that purpose was improper unless the gross profit and such books of account were examined and rejected by the Assessing Officer. The learned CIT(A) pointed out that the assessee vide letter dated 30/01/2009 had filed large number of confirmations which had been accepted by the Assessing Officer in the assessment of the succeeding assessment year and most of the persons were same suppliers/creditors who had been doing business with the assessee in the past years and subsequently also under the same business conditions/practice from year to year. The learned CIT(A) pointed out that in the subsequent assessment year an opportunity was provided to the assessee for verification of such purchases, the same had been carried out and most importantly there was no adverse/incriminating material showing that any entry/transaction of the assessee had been contrarily proved/found wrong and false. The learned CIT(A) observed that the application of section 68 of the I.T. Act by the Assessing Officer on the trading liabilities in first place was legally incorrect and secondly no proceedings were taken to further verification of the creditors and fiction of section 68 has been utilized to hold those credits unverifiable and unexplained. According to the learned CIT(A), the Assessing Officer has not questioned the correctness and completeness of the books of account of the assessee. He also pointed out that books of account were audited and there was no infirmity in Col. 13 of Form 3CD report which reported quantitative details of raw material, closing stock, consumption etc. which showed that 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. The learned CIT(A) also pointed out that though the proceedings of verification and examination of the credit balances/liabilities had been carried out by the Assessing Officer with reference to section 41 of the Act but the same had not been carried out further on those lines perhaps accepting that the conditions for applicability of section 41 did not exist. The learned CIT(A) held that the addition made by the Assessing Officer was legally incorrect and section 68 could not be pressed to service for addition of "business liabilities" The reliance was placed on the judgment of Hon'ble Jurisdictional High Court in the case ofPancham Das Jain (supra). Accordingly, the addition made by the Assessing Officer was deleted. Now the department is in appeal.

11. The Learned DR strongly supported the order of the Assessing Officer and submitted that the creditors were not verifiable, so the addition was rightly made by the Assessing Officer and the learned CIT(A) was not justified in deleting the addition.

12. In his rival submissions, the learned counsel for the assessee reiterated the submissions made before the authorities below and further submitted that the Assessing Officer asked the assessee to file the details of current liabilities and the assessee furnished the break-up of the liabilities as was asked. It was contended that the Assessing Officer required the assessee to furnish names and addresses of the creditors for the sum which actually represented the amount payable to the suppliers of the raw hides and the assessee in compliance, put on record of the Assessing Officer the names and addresses of the raw hide suppliers. The learned counsel for the assessee referred to the page No. 219 of the assessee's compilation which is the copy of the letter of the Assessing Officer written to the assessee. It was contended that the assessee, in response to the Assessing Officer's letter, explained the whole process of purchase of raw hides vide reply dated 17/12/2007 and categorically stated that no addition u/s 41(1) was legally feasible. The reference was made to page No. 222 of the assessee's compilation which is the copy of the letter written during the assessment proceedings to the Assessing Officer. It was contended that the Assessing Officer failed to appreciate the facts of the case since there was no introduction of cash, rather in contrary for every credit there was a corresponding debit, evidencing purchase of raw hides shown in the profit & loss account, ultimately resulting in production of finished leather for being exported to overseas countries and the unpaid purchase price was paid in the subsequent year i.e. financial year 2005-06. Therefore, the addition made by the Assessing Officer was rightly deleted by the learned CIT(A). The reliance was placed on the following case laws:

(1)	Pancham Dass Jain (supra)
(2)	Asstt. CIT v. Harsingar Gutkha (P.) Ltd. [IT Appeal Nos. 573 & 574/Luck/2007, dated 14-3-2008]
(3)	Sumer Chand Jain v. CIT [2007] 292 ITR 241/164 Taxman 50 (MP)
(4)	Jt. CIT v. Mathura Das Ashok Kumar [2007] 14 SOT 72 (URO) (All.)

12.1 The learned counsel for the assessee further contended that the Assessing Officer, after having accepted the book results, purchase, consumption, local/export sales etc. could not have ignored the unpaid purchase price in respect of raw material particularly when such unpaid purchase price had been paid in the succeeding year.

13. We have considered the rival submissions and carefully gone through the materials available on the record. In the present case it appears that the Assessing Officer 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 The Assessing Officer did not point out any suppressed sale and inflated purchase. Even 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. The Assessing Officer did not rebut this contention of the assessee that the liability against the purchase had been paid in the succeeding year. Moreover, the learned CIT(A) categorically stated that during the assessment proceedings for the assessment year 2006-07, the assessee filed the confirmation from 1,478 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. In other words, when the Assessing Officer did not doubt the purchases and the gross profit rate, there was no occasion to doubt the corresponding creditors of the purchases. In that view of the matter, we do not see any infirmity in the order of the learned CIT(A) on this issue.

14. The last issue, vide ground Nos. 7 & 8 relates to the deletion of addition of Rs. 5,00,000/- made by the Assessing Officer on account of disallowance of expenses claimed under the head "power & fuel".

15. The facts related to this issue, in brief, are that the assessee had debited a sum of Rs. 2,40,20,168/- under the head "power & fuel" as against Rs. 1,74,45,423/- in the immediately preceding year. The Assessing Officer asked the assessee to furnish details of those expenses and justify increase of expenses to such extent. The assessee submitted that the main factor for increase in expenditure under this head was on account of increase in diesel rate from Rs. 22.30 per litre to Rs. 26.46 per litre. It was also submitted that there had been continuous roasting/power breakdown due to power shortage which increased the expenditure towards purchase of diesel. The Assessing Officer, after considering the submissions of the assessee, observed that the assessee could not substantiate its claim that the entire expenditure was incurred only for business purpose. It was further observed that the assessee could not furnish the supporting evidence in respect of the expenses debited under this head and that the assessee could not also justify the disproportionate and abnormal increase in the total expenses as compared to the last year. The Assessing Officer, to cover up the expenses which had not been incurred for business purposes, made the ad hoc addition of Rs. 5,00,000/-.

16. The assessee carried the matter to learned CIT(A) and submitted as under:

"It is wrong that the assessee could not substantiate that the entire expenditure was incurred for business purposes and could not furnish the supporting evidence in respect of all the expenses debited under the head power and fuel expenses. The details of expenses incurred under this head are as per statement placed at pages 234 to 244 of paper book No. 1. This statement was submitted to the ld. AO.

The purchases of coal, diesel etc. which constitute the above expenditure are made from regular and established sources. The ld. AR never asked the assessee to produce the original purchase bills. Copies of bills are placed at pages 1 to 180 of paper book No. 1.

The assessee has asserted before the ld. Assessing Officer that the entire material so purchased was used for business purposes. There was no evidence at all with the ld. AO to show that any part of the said material was diverted for non-business use.

The contention of the ld. AO that the assessee could not justify the disproportionate and abnormal increase in the total expenses as compared to last year, is also incorrect. The increase in expenditure is not disproportionate and abnormal. The total expenses have increased from Rs. 1,74,45,423/- in F.Y. 2003-04 to Rs.2,40,20,168 i.e. an increase of 37.69%. It was explained that expenditure on diesel (which is used for running the generators) is the main constituent of the total power and fuel expenses. The price of diesel increased from Rs. 22.30 per litre in 2003-04 to Rs. 26.64 per litre in 2004-05 i.e. an increase of 18.66%. A complete chart showing rate for purchases of diesel during the year is appearing on page Nos. 240 to 244 of paper book No. 1. It was also explained that Kanpur has been the worst sufferer on account of frequent power roistering (which fact is well-known to even a common man and does not require any proof) which necessitated the continuous running of generators thereby resulting in higher consumption of diesel during the year. The explanation offered by the assessee before the ld. AO was quite satisfactory and there was no justification to reject it.

In the above, the disallowance of Rs. 5,00,000/- deserves to be deleted."

16.1 The learned CIT(A), after considering the submissions of the assessee, observed that the assessee had furnished copies of the purchase bills and the increase in cost of power and fuel was supported by the explanation that the diesel prices had gone up. It was pointed out that the expenses were suitably supported by payments, bills and vouchers, so the addition made by the Assessing Officer was without any basis and uncalled for. The learned CIT(A) also noted that the Assessing Officer had examined those expenses but had not noted any discrepancy in the record and also in the practice of consumption of power and fuel. According to him, the only reason relied by the Assessing Officer was his suspicion for increase in the cost and a belief that the part of it was not used for business purpose. According to learned CIT(A), the element of personal use of industrial consumption was probable and also not possible and that if it indicated to consumption of diesel, the same was covered in the estimated disallowance under the head vehicle running and maintenance. He, therefore, deleted the ad hocdisallowance made by the Assessing Officer. Now the department is in appeal.

17. The Learned DR strongly supported the order of the Assessing Officer and further submitted that the increase in expenses in comparison to the earlier year was to the extent of 37.69% whereas the increase in the price of diesel was only of 18.66%, so there was abnormal increase in the total expenses under the head power & fuel charges, therefore, the Assessing Officer rightly made the addition.

18. In his rival submissions, the learned counsel for the assessee reiterated the submissions made before the authorities below and further submitted that the assessee furnished complete details before the Assessing Officer. A reference was made to page Nos. 240 to 244 of the assessee's paper book which are the copies of bills evidencing the purchase of diesel. It was contended that the entire material purchased was for the business purpose and nothing was brought on record by the Assessing Officer to substantiate that any part of the diesel was diverted for non-business use. It was contended that increase in price to the extent of 18.60% accounted for the increase in expenditure and the balance increase was accounted for by frequent roasting in supply of power and also power breakdown due to power shortage.

19. We have considered the rival submissions and carefully gone through the materials available on the record. In the instant case the Assessing Officer made the ad hoc disallowance only on the basis of assumption that the diesel was used for non-business purpose. At the same time, the disallowance was also made under the head "vehicle running & maintenance" for personal use i.e. for non-business purpose. In that view of the matter, we are of the view that the learned CIT(A) rightly observed that if any disallowance was there, that was covered under the disallowance from vehicle running and maintenance expenses. In the present case, the Assessing Officer did not doubt the increase in the price of diesel and had also not rebutted this contention of the assessee that there was shortage of power. Moreover, nothing was brought on record to substantiate that the diesel was used by the assessee for non-business purpose. So the ad hoc disallowance made by the Assessing Officer was not justified and the learned CIT(A) rightly deleted the same. We do not see any infirmity in the order of the CIT(A).

20. Now we will take up Cross Objections of the assessee. In this Cross Objection, the only ground taken by the assessee relates to the sustenance of part of the addition by way of interest attributable to the debit balance appearing in the account of sister concern.

21. The facts related to this issue, in brief, are that the Assessing Officer, during the assessment proceedings, noticed that the assessee had made loan & advances of Rs. 4,32,67,941/- during the year under consideration, as against Rs. 22.23,65,443/- in the immediately preceding year. The Assessing Officer noticed that the assessee had advanced a sum of Rs. 1,01,24,575/- to a private limited company under the same management and the said amount was appearing as opening balance. He, therefore, was of the view that the loan to the company was covered under the provisions of section 40A(2)(b) of the IT Act, 1961 and the assessee did not have charged any interest on it. He also observed that the assessee had debited a sum of Rs.97,05,311/- on account of interest which included interest on exports amounting to Rs.76,11,408/-. He, therefore, asked the assessee to explain as to why the interest computed @12% on the amount of loan of Rs. 1,01,24,575/- may not be disallowed out of the interest debited to the profit & loss account which would result in an addition of Rs. 12,44,949/-. The Assessing Officer disallowed the aforesaid amount and added to the income of the assessee.

22. The assessee carried the matter to the learned CIT(A) and submitted that there was no nexus between advance given in the assessment year 1995-96 and financial facility availed during the year under consideration. The assessee also furnished the written submissions which read as under:

"(a)	The amount of loan in question was granted by the assessee to M/s. Zaz Leather Complex Pvt. Ltd. in the F.Y. 1995-96. This company is the subsidiary of the assessee company. In the year 1995-96, the assessee has enough funds of its own and the above loan was granted out of its own funds and not out of any borrowings. The loan was granted for meeting the funds requirement of the said subsidiary company. It was in business interest of the assessee to help the subsidiary to meet its financial commitments.
(b)	The assessee has not been able to enforce repayment of the said loan because it would have adversely affected the finances of the said company. The said loan is still outstanding.
(c)	That the credit facilities are specifically for exports and not for any other purposes. The interest on these credit facilities is payable at the rate of 9% per annum.
(d)	It is further relevant to point that the assessee has paid interest on borrowing @ 9% but the ld. AO has computed interest on outstanding loan @ 12%. From this fact it is clear that the ld. AO has not disallowed part of the interest expenditure incurred by the assessee during the year but has in fact proceeded to tax deemed interest on outstanding loan.
(e)	It is further submitted that the above disallowance has been made by invoking section 40A(2). The addition u/s 40A(2)(a), can be made where the assessee incurs any expenditure in respect of which payments have been made to any person referred to in section 40A(2)(b)."

22.1 The learned CIT(A), after considering the submissions of the assessee, observed that the assessee had advanced the amount of Rs. 1,01,24,575/- to the sister concern on which no interest had been charged. At the same time the assessee had paid interest @9% on the various credits available during the year for the purpose of business. The learned CIT(A) held that making advances to sister concern for its survival was business interest of the assessee, was not valid because both were two separate entities and the normal business practice of charging interest has to be considered separately for both of them. He further observed that shifting of interest burden by availing credit and passing interest free funds to the sister concern was not permitted under law and was not possible as per accounting principles. He was of the view that the interest burden taken by the assessee @9% on the loans during the year was very much connected to the amount of advance made to the sister concem without charging interest which calls for disallowance of interest paid on loans @9% instead of 12% as done by the Assessing Officer because there is no provision under the I.T. Act for charging notional interest to tax under the computation of income from business and profession. The CIT(A) did not find merit in this argument of the assessee that surplus fund was available and there was no nexus between the amount advanced and the loan taken and interest paid to the bank because it was old balance. Accordingly, the learned CIT(A) directed the Assessing Officer to disallow interest @9% as against 12%. Now the assessee had filed the Cross Objection against the action of the CIT(A).

23. The learned counsel for the assessee reiterated the submissions made before the learned CIT(A) and further submitted that the advance to the sister concern was given in the year 1995-96 so it has no connection with the interest bearing loans taken by the assessee during the year under consideration. It was further submitted that the assessee was having surplus funds during the year 1995-96 so the advances were not given to the sister concern out of the interest bearing funds. He further submitted that the addition made u/s 40A(2)(b) was not sustainable since the said provision of law contemplates expenditure in respect of payments made to the person referred to in the said section whereas interest has not been paid to any person covered by the said provision of the law rather the interest had been paid to the bank and to PICUP. Therefore, sustenance of part of addition on account of interest is not justified. The reliance was placed on the following case laws:

(i)	CIT v. Radico Khaitan Ltd. [2005] 274 ITR 354/142 Taxman 681 (All.)
(ii)	CIT v. Prem Heavy Engineering Works (P) Ltd. [2006] 285 ITR 554/150 Taxman 90 (All.)
(iii)	Smt. Chanchal Katyal v. CIT [2008] 298 ITR 182/[2007] 165 Taxman 215 (All.)
(iv)	Meenakshi Synthetics (P) Ltd. v. Asstt. CIT [2003] 84 ITD 563 (Luck.)

24. In his rival submissions the Learned DR strongly supported the order of the learned CIT(A) and further submitted that the commercial expediency was required to be established by the assessee with the sister concern and since the advances were made interest free while the assessee was paying the interest on the loans, so the disallowance was rightly made. Reliance was placed on the judgment of Hon'ble Punjab & Haryana High Court in the case of CIT v. Abhishek Industries Ltd. [2006] 286 ITR 1/156 Taxman 257.

25. We have considered the rival submissions and carefully gone through the materials available on the record. In the instant case it is not in dispute that the assessee had advanced interest free advances to the sister concern, however, the said advance was given in the year 1995-96 and the claim of the assessee is that in the said year surplus funds were available with it. The explanation of the assessee that there was no nexus between the interest free advances and the interest bearing loans had not been considered either by the Assessing Officer or by the learned CIT(A). In the instant case, it is not clear as to whether there was any nexus in-between the interest free advance to the sister concern and interest bearing loans. It is also not clear as to whether the assessee was having surplus fund more than what was given to the sister concern. We, therefore, considering the totality of the facts, deem it proper to set aside this issue back to the file of the Assessing Officer for fresh adjudication in accordance with law after providing due and reasonable opportunity of being heard to the assessee.

26. In the result, the departmental appeal is partly allowed for statistical purposes while the Cross Objection of the assessee is allowed for statistical purposes.

ORDER

I.S. Verma, Judicial Member - I have gone through the proposed draft order authored by learned brother, N.K. Saini and after considering the totality of the facts and circumstances of the case, have not been able to persuade myself with the draft order with respect to ground Nos.3 to 6 raised by the revenue in its appeal and decided by the ld. Brother as per paras 8 to 13 of the draft order.

2. Ground Nos.3 to 6 read as under :
"3. That the ld. CIT(A) 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(A) 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 AO u/s 145 of the Income-tax Act, 1961.

5. That the ld.CIT(A) 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 inasmuch as that the goods to the extent of these amounts are accepted to be received, purchased and traded/manufactured by the appellant during the year.

6. That the ld. CIT(A) 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."

3.1 The brief facts relating to the issue involved in these grounds, which relate to the genuineness of liability amounting to Rs.10,78,71,656 shown by the assessee under the head "Raw hides supplier", are that during the course of assessment proceedings, the AO noticed from the balance sheet as on 31st March, 2005 that the assessee had shown following liabilities :

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

3.2 When the assessee was called upon to furnish the complete address with respect to aforesaid liabilities shown in the balance sheet, the assessee was able to provide the complete names and postal addresses with respect to liabilities on account of chemical supplier, Misc. supplier and upper supplier but so far as liability shown under the head "Raw hides supplier" was concerned, the assessee could supply the names and addresses only with respect to an amount of Rs.7,38,766 i.e. liability worth Rs.7,38,766 out of liability of Rs.10,78,71,656 was explained to be outstanding/payable in the account of M/s. Zaz Leather Complex (P.) Ltd. With respect to rest of liability, which was shown to be outstanding on account of credit purchases, the assessee could not furnish the names as well as addresses of the persons/parties/suppliers in whose account the liability was shown to be outstanding on account of credit purchases. With respect to this issue, the assessee had first submitted that liabilities were on account of various suppliers from various mandies, details of which were as under:

	(1) Malerkotla Mandi	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

3.3 Since the assessee had not furnished the details as to the names of the persons and their addresses from whom the raw hides of goat were purchased or from whom the amount in the shape of credit had been taken by the assessee and also the details as to whom the huge amounts of Rs. 10,78,71,656 were payable, the assessee was given another opportunity whereby the assessee was specifically required to give the names and complete postal address of the sundry creditors of raw hides.

3.4 In response to AO's aforesaid requirement, the assessee furnished a written reply dated 30.11.2007, which reads as under :

"M/s. Zazsons Export Ltd.
Jajmau, Kanpur. Date: 30.11.2007
Dy. Commissioner of Income-tax, Kanpur.

Dear Sir,

In continuation to our submissions filed earlier in respect of assessment proceedings for the assessment year 2005-06 asking the company to give complete postal addresses of raw hide creditors whose balances are outstanding as on 31.3.2005. In this connection it is submitted as under:

1. Assessee company had outstanding creditors for supply of raw hide (Goat) in different previous years of which complete details of outstanding creditors were filed in the assessment proceedings for the earlier years as under:

Previous Year	Asst. Year	Outstanding creditors of supply of raw hide (Goat)
2001-02	2002-03	3,63,81,768.00
2002-03	2003-04	6.92,62,519,55
2003-04	2004-05	10,02,24,963.21

Complete details of balances were filed during the assessment proceedings of the earlier year.

Complete details of balances appearing on different assessment years is appearing on page Nos. 4 to 12.
2. During the assessment year 2005-06 total outstanding of raw hide (Goat) supplier is Rs. 10,78,71,656.31. Thus there has been an increase of Rs. 76,46,693.10 only as compared to last year.

3. Outstanding balances of each raw hide (Goat) suppliers is ranging from Rs. 10,000 to Rs.20,000 that too in cases where assessee company could not pay at the time of making purchases. The total purchases from each vendors is maximum upto 30,000 in few cases only.

4. There is no permanent establishment of any raw hide supplier in the Mandi. There is a weekly hat (Bazar) in Mandies wherein these supplier place their open area. After collecting from different Mutton shops of different Mohalla, City or nearby town, Tehsil, Village etc. Since those persons reside at in the city where these hats are held for convenience we record outstanding balance in the name of that person against the Mandi he is residing.

5. Employees of the company makes regular visit by carrying cash to make purchases on that day. These employees negotiate with each raw hide vendor in respect of rate and makes selection on spot. Account of each hide vendor is prepared and being paid and if any outstanding remains a slip outstanding balance is given to said vendor on presentation payment is made to such vendor and payment is recorded in the books. Purchases are recorded on the day of making purchases. Complete details in respect of sorting, accounting, making payment together with transport receipt, Mandi receipt and expenses related to transportation, travel, allowances etc. are recorded in the books and original supportings are kept for audit and verification. Copies of few recording of transaction of each purchases from Mandis are enclosed for your kind verification and perusal, if needed we can file all relevant supportings and vouchers for making purchases of raw hide for the whole year to confirm the purchases from raw hide vendors (Pages 135 to 195).

6. Transaction relating to purchases of raw hide is quite different from purchases of raw hide of cow and buffalo. There are plenty of dealers of raw hide of cow and buffalo who sell the hide to different tanneries on credit of 3/4 months on increased rate by 25% to 30%. The assessee-company makes cash purchases from vendors on spot selection by a lesser rate at least by 30%. The quantity of raw hide got required by the assessee-company are not available with registered dealers, if any that too at different places. Hence assessee has no option but to make purchases directly from mandies.

7. It is the creditworthiness of the assessee-company (for vendors have no other option otherwise to seek to other tanneries) vendors, keep balance outstanding with the assessee-company. Hence this amount is outstanding. Outstanding balances, is being paid by the company on presentation of outstanding slip issued at the time of making purchases confirming the outstanding.

8. Since these vendors have no regular shop or stall and amount of outstanding is hardly Rs. 20,000 each, keeping their postal addresses is unwarranted as payments are made on presentation of slip. However, we are enclosing herewith postal addresses of few vendors which are available to us (Page Nos. 196 and 197).

8A. All purchases of raw hide of 3308163 Pcs during the year are fully vouched and verifiable and over 30,00,000 Pcs of raw hide were manufactured/finished and more than 29,00,000 Pcs. of goat leather were exported/sold during the year. Outstanding balance of over 10,00,00,000 by the previous year relevant to the assessment year 2004- 05 were paid during the year. Thus there is net increase in outstanding balance of Rs. 76,46,693.10 during the year under consideration which quite reasonable.

9. Assessee company has taken advantage by making cash purchases of reduction of cost to be competitive in the global market. Assessee-company has utilized its own fund for making purchases. No facility from bank

From the above facts your honour will appreciate that the purchases of raw hide are genuine. Thus the liability on account of purchases of raw hide is also genuine and as in preceding years which were accepted by the department since 1989. It is, therefore, requested to kindly accept the basis and manner and accounting of purchases of raw hide.

Thanking you,

Yours faithfully,
For Zazsons Export Ltd.
Sd."

3.5 From the aforesaid reply of the assessee, the AO noticed that entire outstanding balance on account of liability tinder the head "Raw hides supplier" shown as on 31st March, 2004 stood repaid by the assessee during the previous year relevant to the assessment year 2005-06 and the entire amount of liability under this head shown as on 31.3.2005 was on account of credits entered into the books of account during the previous year relevant to assessment year 2005-06. The AO further came to the conclusion that since the assessee had failed to furnish the details of the person as to from whom the purchases were made (if the outstandings were on account of credit purchases) as well as the details required under section 68 of the Act, if the liability shown by the assessee was on account of cash credits other than trade creditors, he proceeded to invoke the provisions of section 68 of the Act and therefore, allowed the assessee another opportunity to explain his case.

3.6 The assessee furnished another letter dated 17th Decembcr,2007 wherein it was submitted that the transaction with the vendors had been made for the business purposes only and payments to these parties are being made in the regular course of business. According to the assessee, the identity, whereabouts and creditworthiness of these vendors is unquestioned. It was further submitted by the assessee 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, as admitted by the assessee, the payments are made at instalments at the time of next visit/or on their visit for collecting the payment from the factory and such payments are made at presentation of slip for outstanding amount. It was reiterated that these vendors have no regular shop but collect raw hide from other petty butcher, mutton shop owners who assemble at the time of weekly market and the assessee has purchased raw hides from such vendors regularly and has been making payments in normal course of business. It was, therefore, the submission of the assessee that the question of creditworthiness of such vendors for supply of raw hide is undoubted and unquestioned. According to the assessee, due to confidence and trust of these vendors, they supply raw hide of goats on credit as they are assured to get their payment as and when demanded. The assessee further submitted that the purchase transaction in relation to raw hide of goat is quite different from the purchase of raw hide of buffalo and cow as in both the cases there are regular dealers having established in different places and buyers of buffalo and cow hides are also spread all over the country. Therefore, according to the assessee, the questioning of identity and creditworthiness and postal address of such vendors is unwarranted as the assessee company had made almost 65% payments on spot of total purchases of hide and the balance amount was outstanding at the end of year which has also been paid in the next year or spreading to one month to four months which is common practice in the trade of leather/raw hides. As per the assessee, the outstanding amount appearing in the name of raw hide suppliers was just normal outstanding. However, when the assessee was asked to furnish the complete postal address of such vendors, the assessee vide its reply dt. 17.12.2007 again submitted 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 whereabout 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 I. T. Act, 1961 is unwarranted. This outstanding is normal outstanding and arrived at in the normal course of business and as per business practice. All purchases are fully vouched and verifiable and properly recorded in the books of account."

3.7 After having considered the aforesaid replies of the assessee and the fact that the assessee had, though, claimed the liability shown under the head "Raw hides supplier", as on account of credit purchases but having failed to furnish the names and addresses of the persons from whom the credit purchases were made, the AO came to the conclusion that –

(i)	The liability amounting to Rs.10,78,71,656 shown under the head "Raw hides supplier" was not on account of credit purchases; and
(ii)	the liability, in question, was on account of cash credits.

3.8 Further, since the assessee had also failed to furnish the details necessary for discharging the initial onus put on it under the provisions of section 68 i.e. had failed to establish the identity of the creditors, capacity of the creditors as well as the genuineness of the transactions, which had resulted in the liability worth Rs. 10,78,71,656, the AO invoked the provisions of section 68 of the Act and considered the liability worth Rs. 10,78,71,656 as unexplained cash credits, which remained unexplained. In other words, the AO has concluded that the liability in question was not on account of credit purchases, rather was on account of cash credits introduced by the assessee in the garb of credit purchases, which remained unexplained. He, therefore, made the addition of Rs. 10,78,71,656. Relevant part of AO's order reads as under :

'6. A perusal of the balance sheet shows that as on 31.03.2005, the assessee has shown current liabilities to the extent of Rs. 14,39,734/-. The details of these current liabilities are appearing in Schedule-10 according to which these liabilities includes sundry creditors of Rs. 13,13,54,090/-. The assessee was required to furnish the details of these sundry creditors with supporting verification/confirmation. The assessee vide its reply dt. 08.10.2007 furnished the summary of the sundry creditors which is being reproduced hereunder:–

	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/-

With regards to the details of the sundry creditors other than raw hides by, the assessee provided the complete name and postal address of such sundry creditors. However, in respect of the raw hides/leather suppliers, the assessee could not furnish the complete address and name of any of hide supplier except the name of M/s. Zaz Leather Complex Pvt. Ltd. against which the amount of Rs. 7,38,766/- has been shown as outstanding. This company is closely related with the assessee and is covered within the provisions of Section 40A(2)(b) of the I.T. Act, 1961. In respect of the others, the assessee has even failed to give the names of the suppliers and has given the details of the name of market of particular city, a few examples of which are given hereunder:–

	(1) Malerkotla Mandi	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

Etc.

From the perusal of the details furnished, it is clear that the assessee has not been able to give even the complete list of the persons from whom the raw hides 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. The assessee was, therefore, specifically required to give the detail, name and complete postal address of the sundry creditors of raw hides. The assessee vide reply dt. 30.11.2007, submitted that these vendors have no regular shops or staff and amount outstanding is hardly Rs.20,000/- each. Hence keeping of their postal address is unwarranted as payments are made to them on presentation of the slip issued by the assessee. It was also submitted by the assessee that all the purchases of raw hides during the year are fully-pouched and verifiable and outstanding balance of over Rs.10 crore of the previous year relevant to the Assessment Year 2004-05 were paid during the year. Thus, it was the contention of the assessee that there was a net increase in outstanding balance of Rs. 76,46,693.10 only during the year under consideration which is quite reasonable. The assessee also furnished the details of sundry creditors as on 31.03.2004 according to which the sundry credits in respect of, raw hide supplier were of Rs. 10,02,24,963/- as against sundry credit for raw hide as on 31.03.2005 of Rs. 10,78,71,656/-.

7. However, it is worth noticing that the assessee vide its reply dated 30.11.2007 has admitted that the entire outstanding balance of such 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 supplier was received during the year under consideration and no credit pertains to the previous year. Hence, the entire amount is the credit of the year under consideration and the provisions of Section 68 can be invoked in respect of all such credits.

8. Further, vide its letter dated 17.12.2007, the assessee submitted that the transaction with the vendors had been made for the business purposes only and payments to these parties are being made in the regular course of business. According to the assessee, the identity, whereabouts and creditworthiness of these vendors is unquestioned. It was further submitted by the assessee 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 as admitted by the assessee, the payments are made at instalments at the time of next visit/or on their visit for collecting the payment from the factory and such payments are made at presentation of slip for outstanding amount. It was reiterated that these vendors have no regular shop but collect raw hide from other petty butcher, mutton shop owners who assemble at the time of weekly market and the assessee has purchased raw hides from such vendors regularly and has been making payments in normal course of business. It was, therefore, the submission of the assessee that the question of creditworthiness of such vendors for supply raw hide is undoubted and unquestioned. According to the assessee, due to confidence and trust of these vendors, they supply raw hides of goats on credit as they are assured to get their payment as and when demanded.

9. To add further, the assessee submitted that the purchase transaction in relation to raw hide of goat is quite different from the purchase of raw hide of buffalo and cow as in both the cases there are regular dealers having established in different places and buyers of buffalo and cow hides are also spread all over the country. Therefore, according to the assessee, the questioning of identity and creditworthiness and postal address of such vendors is unwarranted as the assessee-company had made almost 65% payments on spot of purchase of hide and the balance amount was outstanding at the time of year which has also been paid in the next visit or spreading to one month to four months which is common practice in the trade of leather/raw hides. As per the assessee, the outstanding amount appearing in the name of raw hide suppliers was just normal outstanding. However, when the assessee was asked to furnish the complete postal address of such vendors, the assessee vide its reply dt. 17.12.2007 submitted as under:–

"We are unable to furnish and give complete postal addresses of those vendors as they assemble at the weekly Mandi. Assessee has no concern of their whereabout 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 venders 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 I.T. Act, 1961 is unwarranted. This outstanding is normal outstanding and arrived at in the normal course of business and as per business practice. All purchases are fully-vouched and verifiable and properly recorded in the books of account." '

10. From the perusal of the above, it is clear and admitted by the assessee that it does not have any postal or complete address of those vendors from whom the purchase are made which shows that the credits appearing against their names cannot be verified at all. 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 lakh 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 25.07.2004 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 15 of July from 1st July amounting to Rs.2,09,4601- 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 only 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. The assessee has 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 of various persons, whereabouts of which and identity in respect of which is neither verifiable nor available.

11. From the discussion made in the preceding paras, it is crystal clear that none of the vendors or creditors appearing against the purchase of raw hides are verifiable. All the arguments and contentions as given by the assessee during the course of assessment proceedings are not reliable and quite away from the reality. It is a fact that the assessee was having sundry creditors against the raw hides to the extent of Rs. 10,78,71,656/- and none of the sundry creditor was verifiable. The assessee failed to give their postal address, whereabouts, creditworthiness and also could not prove the genuineness of the transaction. As such, the credit appearing in the balance sheet amounting to Rs. 10,78,71,656/appears to be the unexplained cash credit introduced by the assessee-during the year under consideration as it has already been contended by it that the sundry creditors appearing as on 01.4.2004 have already been repaid their amount. Therefore, the amount of Rs. 10,78,71,656/- is the unexplained cash credit in the hands of the assessee and the same would be added to the total income of the assessee u/s 68 of the IT Act, 1961.

3.9 The assessee went in appeal before the CIT(A) and relied on Statement of Facts furnished before the CIT(A) and reproduced in para 22 of the appellate order, which reads as under:

"An amount of Rs. 10,78,771,656/- 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.l 0,78,71,656/- 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 section 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 purchase 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"

3.10 The assessee made written submissions as per letter dated 16th October, 2008 with respect to addition on account of liability of Rs.7,38,766 outstanding in the name of M/s. Zaz Leather Complex (P.) Ltd., which have been reproduced by the CIT(A) in para 23 of his order and read as under :

"(1)	The addition u/s 40A(2)(a), can he made where the assessee incurs any expenditure in respect of which payments have been made to any person referred to in section 40A(2)(b) and the AO is of the opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods for which payment is made.
(2)	The amount standing to the credit of Zaz Leather Complex Pvt. Ltd. is not "expenditure in respect of which payments have been made" but is merely a credit balance which admittedly has not been paid during the year.
(3)	The AO has not recorded his opinion that purchases made from the said company is "excessive or unreasonable having regard to the fair market value of the goods for which payment is made". In the absence of any such finding and formation of opinion the question of making any addition u/s 40A(2)(a) does not arise.
(4)	Thus addition of credit balance of Rs. 7,38,766/- standing in the name of Zaz Leather Complex Pvt. Ltd., in the income of the assessee is patently erroneous."

3.11 The assessee further made written submissions with respect to balance of liability of Rs. 10,71,32,890, which have been reproduced by the CIT in para 24 of his order, which are in the following terms :

"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 made u/s 143(3). The accounts of the assessee have not been rejected and provisions of section 144 have not been invoked.
(3)	The above credit balances could not be added to total income by invoking section 41(1) at all. Section 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 assesses 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 assessee offers no explanation about the nature and source 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 section 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 & 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 us 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 (goat)
	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, wherabouts, 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 mandis. The postal address of the suppliers is care of those mandis. It is nobody'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."

3.12 Thereafter the assessee is stated to have furnished certain documents and information which were required by the CIT(A). According to the CIT(A), these details which were inclusive of list of parties to whom the payments were made in the next year and audited accounts were filed as per Annexures 2 and 3 on 25.11.2008.

3.13 The assessee further made submissions as per letter dated 30.1.2009, contents of which have been reproduced by the CIT(A) in para 26 of his order, which reads as under :

"In respect of above appeal we wish to state that during the course of assessment proceedings for the assessment year 2006-07 before ld. Dy. Commissioner of Income-tax-6, Kanpur we have filed confirmations from 1478 vendors of 11 Mandies confirming outstanding balance appearing as on 31.3.2006 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-I confirming the transaction and balance payable as on 31.3.2006. Most of the vendors were also raw hide supplier in the assessment year 2005-06 (Appeal pending). We have highlighted the green Ink on whose names are common in the list of assessment year 2005-06 and whose confirmations have been filed. Most of 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. 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."

3.14 During the course of appellate proceedings, the assessee also furnished the names of persons and outstanding balance as on 31.3.2006 as well as confirmations from them in support of claim of having paid the liability outstanding on 31.3.2005 in the next wear as well as copy of assessment order for assessment year 2006-07 and thereafter made further submissions which have been reproduced by the CIT(A) in para 28 of his order and are in the following terms:

"In the matter of CIT Agra 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 section 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 under section 68 (Para-8)'.

'The goods in question having been purchased and the profit arising therefrom having been accepted 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, be 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".

3.15 It was in view of the above facts and circumstances of the case that the CIT(A) deleted the addition of Rs. 10,78,71,656 as per findings contained in paras 29 to 36 of his order, which are in the following terms :

'29. I have considered the facts and circumstances of the case, the detailed findings and description made by AO in the assessment order, the submissions of the appellant and material submitted before me vide paper book in 3 Vols. It is admitted and verified position that the credit balances appearing in the books of the appellant as on 31.3.2004 and added by AO u/s 68, relate to purchases of the raw hide as per account books. The AO proceeded to examine and verify these credits on the parameters and under the provisions of section 68 of the I. T. Act. Section 68 is a deeming provision and creates a fiction which prima facie cannot be extended to other provisions of the Income-tax Act without having such facts and circumstances calling for application of section 68. The criteria and requirement contained in section 68 are —

(a)	identity of the creditor;
(b)	the capacity of the creditor to advance money; and
(c)	the genuineness of the transaction.

30. The admitted position in this case, on this issue, is that the credits are liabilities and dues relating to purchase/procurement of raw hide. Once these credits are accepted as payables against purchases of raw material, same do not fall within the purview of unexplained credits within the meaning of section 68. Once the AO has accepted the trading results including the purchases made during the year, these credits cannot be treated as bogus/non-existent, inasmuch as that the goods to the extent of these amounts are accepted to be received, purchased and traded/manufactured by the appellant during the year. The AO has himself noted that these credits are part of current year only and perhaps he intended to hold that the purchases 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 are found and treated as bogus. However, the trading results of the appellant during the year have been accepted. The relevant books of account and supporting vouchers/hills of manufacturing and trading account have been placed before AO and there is no infirmity or contradiction recorded by AO on such records. It is very relevant on this issue to note and record that the gross profit of the appellant has increased to 12.09% as compared to 9.92% in the preceding year. This indicates that there is no basis for doubting the book results of the appellant without any inquiry and any adverse material/evidence on this issue. Under the circumstances without any question on the purchases of the year, the part of the purchases which are appearing as payables/liabilities in the form of trade credits at the end of the year obviously cannot be added to the income of the appellant. Once purchases are accepted these credits are taken as part of such purchases, then any addition for this purpose is improper unless the gross profit and such books of account are examined and rejected by the AO i.e. which is not the case. There is no indication in the assessment order on the lines pointing any defect in account. Hence arguments of the appellant as noted above in para-24 of this order are liable to be accepted as per the facts and circumstances of the case.

31. The decision referred by the ld. AR in the case of CIT v. Pancham Das Jain [2006] 156 Taxman 507, Allahabad High Court is totally applicable to the facts and circumstances of this case on this issue where it was held that—

"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 purchases made by the respondent-asses see 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."

32. I would further consider the submissions brought on record by ld. AR vide letter dated 30.1.2009 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 assessment year 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. 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"

33. It is seen that the AO 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 R.B. Jessaram Fatehchand (Sugar Deptt.) v. CIT [1970] 75 ITR 33 (Bom.) 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 M. Durai Raj v. CIT [1973] 83 ITR 484 (Ker.).

34. The AO has not questioned the correctness and completeness of the hooks of account of the appellant during the year. The audited account books and auditors report also filed before me, prima facie do not show any infirmity and Col. 13 of Form 3CD report giving quantitative details of raw material closing stock consumption, etc. are also noted in the said report. This shows that the proper records in respect of production, consumption, purchases, etc. are available with the appellant which have been duly audited and there is no adverse finding available on them. Therefore, I do not find any material available at this stage to reconsider the trading results of the year, particularly so when the gross profit has increased from 9.92% in the last year to 12.09% in the current year.

35. It is also seen that though the proceedings of verification and examination of the credit balances/liabilities have been carried out by AO with reference to section 41 of the Act, but the same have not been carried further on those lines perhaps accepting that the conditions for applicability of section 41 did not exist. In case, creditors were bogus, non-existent and the transactions recorded in the books did not take place at all, the liabilities were liable to be disallowed as non-existent. However, since the addition is not a subject matter of section 41, the facts of the case and argument of the appellant on these aspect becomes redundant for this purpose, only indicating a favourable note for the appellant.

36. In view of discussion above, it is clear that the addition made by AO is legally incorrect and section 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 do hot 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 be 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. l(b) of appeal is allowed.'

4. It was in view of the above facts and circumstances of the case that the Revenue has objected to the order of the CIT(A), whereas the counsel for the assessee has supported the order of the CIT(A).

5. The gist of rival submissions was 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 of such liability is common in this line of business.
(iii)	The liability worth Rs. 10,78,71,656 as on 31.3.2005 having been discharged in the next year and the revenue having accepted the same while completing the assessment for assessment year 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.

8.1-8.3 I have considered the rival submissions facts, circumstances of the case and consider it necessary first to deal with the obligations of the assessee, who is carrying on a business, as to the maintenance of the books of account and other documents to enable the AO to compute his total income in accordance with the provisions of this Act.

(i)	Provisions of section 44A make it mandatory for a person carrying on profession or business to maintain the books of account or other documents and so far as a person carrying on any profession as is envisaged in these provisions is concerned, he is to maintain the books of account and other documents as prescribed under rule 6F of the Income-tax Rules but if the assessee is carrying on the business, then he is to maintain the accounts as per provisions of section 145/145A of the Act and therefore, I consider it necessary to deal with the provisions of section 145 of the Act in this respect which are in the following terms:
	'145. Method of accounting.—(1) Income chargeable under the head "Profits and gains of business or profession" or "Income from other sources" shall, subject to the provisions of sub-section (2), be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee.
	(2) The Central Government may notify in the Official Gazette from time to time accounting standards to the followed by any class of assessees or in respect of any class of income.
	(3) Where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-section (1) or accounting standards as notified under sub-section (2), have not been regularly followed by the assessee, the Assessing Officer may make an assessment in the manner provided in section 144.'
	From the aforesaid provisions, it is quite evident that 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 Gazette from time to time. The aforesaid provisions, in my opinion, envisage a situation that if the assessee has maintained its books of account in conformity with the accounting standard notified by the Central Government and had maintained the books either on cash basis or on mercantile basis, whichever has been regularly employed by him, his books of account are not likely to be rejected except as provided in sub-section (3) of section 145 of the Act, according to which the books of account, can be rejected by the AO, if he is not satisfied about the correctness or completeness of accounts 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 powers to make an assessment in the manner provided in section 144 of the Act. Here a question arises as to how and in what circumstances, the AO can be said to be satisfied with the correctness or completeness of accounts of the assessee and it is, at this stage, that the question relating to assessee's obligation/onus to substantiate its Books of A/c comes into play; meaning thereby that if the assessee succeeds in supporting 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; otherwise not.
(ii)	It is, therefore, clear that the assessee's obligation/onus is not only to support its return but to establish the correctness and completeness of the entries in its books of account with independent evidence and if the assessee fails to do so, then the relevant entry in the books of account becomes doubtful which may be detrimental to the interests of the Revenue and the revenue has power to deal with such an entry in accordance with the provisions of law.
(iii)	So far as the present case is concerned, since it was assessee's claim that liability shown under the head "Raw hides 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 purchases were made, amount of payment made 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 parties, but it is not the case here.
(iv)	In the present case, it is an admitted fact that the assessee has time and again, claimed that maintaining such details is unwarranted; meaning thereby that the Assessee has claimed that he is 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.

8.4 In view of the above I am of the opinion that so far as the case at the level of the AO is concerned, the assessee having admitted that he is 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, its claim that liability, in question, was on account of cash purchases could not be accepted and the AO was quite justified in rejecting the assessee's claim and holding that liability, in question, was on account of cash credits introduced by the assessee from his undisclosed income and in the garb of liability against cash purchases.

8.5 So far as assessee's claim that since it was issuing slips for credit purchases and payments were being made on the production of slip, maintenance of record, such as, names and addresses of such purchase creditors was not required under the law, firstly, I am of the opinion that there is no such law, which could absolve the assessee from obligation of maintaining such records and secondly, the assessee having not brought to our notice any 'so-called slip', its claim cannot be accepted.

9.1 Coming to the order of the CIT(A), I am of the opinion that, as explained, hereinafter, he has proceeded absolutely on the basis of mistaken or distorted facts and understanding the provisions of law and therefore, I prefer to consider the correctness and relevance of his findings contained in paras 30 to 36 (Para-wise as under):

A. Findings in para 30 of the CIT(A)'s order

9.2 (i) The CIT(A)'s observation 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." is 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 us and therefore, the starting point of CIT(A)'s findings itself is based on mistaken/distorted facts.

(ii) In view of the above facts, the very basis of the findings of the CIT(A) in later part of para 30 gets demolished and therefore, I am of the opinion that further observations in this para are redundant and not sustainable in law; meaning thereby that CIT(A)'s conclusion that arguments of the appellant, as noted in para 24 of his order, were liable to be accepted as per the facts and circumstances of the case is unfounded and unsustainable based on mistaken facts.

(iii) From the reading of the contents of this paragraph, it is further observed that the CIT(A) has laid great stress on the finding that "Once the AO has accepted the trading results including the purchases made during the year", these credits cannot be treated as bogus/non-existent.

(iv) After having gone through the material on records and the order of the AO, relevant part of which has been reproduced in para 3.8 of this order, I am of the opinion that this observation of the CIT(A) is absolutely unfounded, incorrect and irrelevant, because, the AO, has nowhere considered/accepted the liability in question as on account of credit purchases. Acceptance of trading account, including the genuineness of the purchases is one thing and different from the fact of considering the liabilities claimed to be on account of credit purchases as not being on account of credit purchases but on account of cash credit introduced by the assessee in the garb of credit purchases, which is a different one.

(v) Without prejudice to the above, I am further of the opinion that it is not correct that the 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 observations of the CIT(A) that the AO having accepted the trading results including purchases, these credits cannot be treated as bogus as non-existent, is absolutely unfounded and unsustainable in law.

(vi) Another observation of the CIT(A) that "………….perhaps he intended to hold that the purchases to the extent of Rs. 10,78,71,656 were bogus" is also not correct because the AO has nowhere considered the purchases to be bogus. What he has considered is that payment against purchases stood made by the assessee during the previous year itself and outstanding liability was on account of introduction of assessee's own funds in the garb of liability on account of credit purchases.

(vii) So far as consideration of this liability as part of current year by the AO is concerned, I am of the opinion that the AO having rejected the liability to be on account of credit purchases and assessee having claimed that similar liabilities for the year prior to the previous year, stood discharged during the previous year, the AO was justified in considering the whole of the liability having been introduced during the previous year relevant to the assessment year 2005-06 itself.

(viii) Next observation of the CIT(A) that "the relevant books of account and supporting vouchers/bills of manufacturing and trading account have been placed before AO and there is no infirmity or contradiction recorded by AO on such records." I am of the opinion that it is also incorrect because it is only on the basis of books and other records produced by the assessee, including the explanations before the AO that the same were found neither to be complete nor to be correct because it could be only if the assessee had furnished the complete details of liabilities worth Rs.10,78,71,656. In absence of details of the parties, amounts paid during the previous year to such parties or balance outstanding against each one of the party, how the outstanding amount was shown as on account of credit purchases is beyond one's imagination and how it could be accepted that it was against credit purchases. The onus, in this respect, was absolutely on the assessee, which remained undischarged and therefore, production, of books of account and bills etc. in absence of details as to the person, amount of purchases or amount paid or remaining payable cannot be said to be correct and complete and therefore, is of no relevance.

(ix) Coming to next observation of the CIT(A) that the gross profit rate in this year was higher than the gross profit rate in the previous year, I am of the opinion that if the books of account are found to be maintained in accordance with the provisions of law and correct and complete, then there is no question of disturbing the trading results irrespective of the fact as to whether the gross profit rate is higher or lower than the gross profit rate in the previous year, but if the books of account itself are found to be incorrect and incomplete, then simply because the gross profit rate shown is higher than the gross profit rate shown in earlier year, cannot exonerate the assessee from the consequences of rejection of the books of account, such as, any addition or any other penal action etc.

(x) So far as the present case is concerned, I am of the opinion that acceptance of correctness of purchases is no bar to investigate the genuineness of the outstanding liability/credits and since the assessee failed to establish that credits in question were on account of credit purchases or were genuine, the AO was quite justified in coming to the conclusion that the credits in question were on account of introduction of assessee's own money under the garb of outstanding against credit purchases and remained unexplained.

B. Findings in Para 31 of the CIT(A)'s order
9.3 (i) In this para the CIT(A) has relied on the following observation of the Hon'ble Allahabad High Court in the case of Pancham Dass Jain (supra), Allahabad High Court:

"We fully agree with the view taken by the Tribunal on this issue, inasmuch as, on the basis of findings recorded by it that these two accounts 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 under section 68 of the Act would not be attracted on the purchases made on credit".

9.3 (ii) Having considered the aforesaid decision and discussion in para 9.2 (i) to 9.2(x) wherein findings of CIT(A) in para 30 have been considered, I am of the opinion that this decision is of no help to the assessee.

C. Findings in para 32 of CIT(A)'s order

9.4 (i) From the contents of this para, it is observed that the CIT(A) has laid great stress on the assessee's claim that since the liability shown as on 31.3.2005 had been discharged by it during the next year and revenue has accepted the same, this liability cannot be disputed and no addition can be made on this account, I am of the opinion that this basis or reasoning is not only unsustainable on facts as well as in law but lays down a dangerous precedent also, because of the following reasons :

(a)	The liability in question can be discharged or paid in the next year only when the details as to the persons/parties and amounts outstanding are known to the assessee and had it been the case, then what prevented the assessee to furnish those details during the course of assessment proceedings for assessment year 2005-06. The assessee's claim that liability in question having been discharged in the subsequent year and confirmation from the recipients having been furnished, the liability as on 31.3.2005 cannot be treated as ingenuine or bogus or as not for credit purchases, in my opinion, cannot be accepted for the reason that the assessee had not furnished such details during the course of assessment proceedings for assessment year 2005-06. His failure leads one to conclude that such details were not available with the assessee at that time and have been fabricated for claiming the discharge of the liability in the next year.
(b)	Without prejudice to this, even if it is taken that the liabilities were discharged in the next year, then also how this fact can be relevant for considering the genuineness of the liability when the assessee had failed to establish its claim that it was on account of credit purchases. The liability on account of cash credits can also be discharged in the next year.
(c)	The genuineness of the liability shown at the end of a year is not dependant on the fact of its subsequent discharge. Under the law, the assessee's onus is to establish the genuineness of the liability on the basis of the facts and law as were during the previous year relevant to the assessment year.
	In the present case, the liability having been shown as on 31.3.2005, the assessee's onus was to prove the genuineness of the same, as on account of credit purchases or on account of cash credits, as the case may be, on the basis of facts and law as were during the previous year i.e. 1.4.2004 to 31.3.2005.
(d)	In the present case, it is admitted fact that the assessee has not established the genuineness of the liability as claimed (on account of credit purchases) and also one on account of cash credits.

(ii) In absence of details as have been referred to in the assessment order how the assessee could find out the persons for making payments and giving confirmations, is a matter which should have been investigated by the CIT(A) before accepting the same as genuine.

(iii) In any view of the case, I am of the opinion that such a claim of the assessee could not convert the ingenuine liability into genuine one and therefore, I am not in agreement with the finding of the CIT(A) in para 32 of his order.
D. Findings in para 33 of CIT(A)'s order

9.5 (i) From this para it is noted that the CIT(A) has objected to the invoking of provisions of section 68 of the Act by the AO on the basis that the liabilities were on account of trading liabilities and the AO had not taken proceedings for verification of the credits. According to him, fiction of section 68 has been utilized without complying with the requirements of section 68 of the Act.

(ii) In this respect, I am of the opinion that the CIT(A)'s observations, time and again, that these were trading liabilities, is not correct, because the assessee had not furnished any evidence in this regard either before the AO or before the CIT(A) and therefore, to hold that the AO's application of section 68 on these liabilities was incorrect, is not correct. On the contrary, the AO, after having rejected the assessee's claim of liability being on account of credit purchases was quite justified in considering the same as cash credits (in the garb of liability on account of credit purchases) and proceeding to verify the same as required under section 68 of the Act.

(iii) So far as the observation that the proceedings under section 68 were not carried on is also not correct because requirements for establishing the assessee's claim that the liability was on account of credit purchases as well as for establishing genuineness of cash credits are the same i.e. in both the cases it is the assessee's onus to establish three ingredients, namely, (i) identity of the person, (ii) capacity of the person and (iii) genuineness of the transaction. If the liability is on account of credit purchase, then second and third ingredients can be established by furnishing necessary evidence for purchases and making of payments, whereas if the liability is on account of credits other than trade creditors, then the same can be established by furnishing several evidences, such as, bank accounts, copies of cheques or drafts etc.; meaning thereby that the requirement of law in both the cases is almost similar and since in the present case, the assessee has admitted itself that it was not having any details as to the person from whom the alleged credit purchases were made or payments made during the previous year or the amounts outstanding against each one of such person at the end of the year, none of the three ingredients meant for both type of cases, was established and therefore, the AO was quite justified in invoking the provisions of section 68 of the Act. Even otherwise; the AO had given the assessee an opportunity to explain the genuineness of the credits and not trade credits and therefore, it was for the assessee to counter the same and establish the genuineness of the same. His insistence that the credit was on account of credit purchases, cannot absolve it of its liability to explain the genuineness of the credits, consequently, the findings of the CIT(A) in this regard, in my opinion, are of no help to the assessee.

(iv) So far as the CIT(A)'s reference to the decision for the proposition that books of account cannot be rejected for want of addresses of the purchasers in respect of cash transactions is concerned, I am of the opinion that it is absolutely an irrelevant and unwarranted reference to the decision. The decision referred to by the CIT(A) relates to the addresses of the parties who had made cash purchases from the assessee and it was, in this context, that the Hon'ble High Court held that this defect was not sufficient for rejecting the books of account. The assessee's case being different than the case cited by the CIT(A), I am of the opinion that reliance by the CIT(A) on this decision is also misplaced and cannot help the assessee.

E. Findings in para 34 of CIT(A)'s order
9.6 (i) These observations of the CIT(A) are covered by observations against contents of paras 30 to 33 and require no further comments.
F. Findings in para 35 of CIT(A)'s order

9.7 I am of the opinion that the AO has not invoked the provisions of section 41 of the Act while completing the assessment and therefore, observations in this behalf are redundant and of no help to the assessee.
G. Findings in para 36 of CIT(A)'s order

9.8 (i) Here again, so far as the observation of the CIT(A) 'that the addition made by the AO is legally incorrect and section 68 cannot be pressed to service for addition of "business liabilities", as in this case, as decided by the Hon'ble Jurisdictional High Court' are concerned, I am of the opinion that there is no dispute in regard to the proposition of law that provisions of section 68 cannot be invoked when the liability in question is on account of business liability i.e. on account of trade transactions or other transactions relating to the assessee's business, but this is not the fact in present case. In the present case, the very claim of the assessee as to the nature of the liability is in dispute and therefore, it was for the assessee to establish its claim; meaning thereby that the fact as to whether the liability in question was on account of business liability or not, the end onus to establish that, was not on the revenue but was on the assessee and it is only thereafter that the proposition of law laid down by the Hon'ble jurisdictional High Court, as referred to by the CIT(A), is of help to the assessee; otherwise not.

So far as the present case is concerned, it is admitted fact that though the assessee had claimed the liability in question as a trade liability on account of credit purchases but, at the same time, it is also an admitted fact that the assessee has failed to establish that the liability in question was a trade liability i.e. was on account of credit purchases; and therefore, under these circumstances, the question of invoking of proposition of law laid down by the Hon'ble High Court referred to in para 36 of the order of the CIT(A) does not arise.

10. In the totality of the facts and circumstances of the case and the discussion as above, I am of the opinion that the assessee having not furnished any detail as to the names and addresses of the person in support of its claim that the liability worth Rs. 10,78,71,656 was on account of credit purchases, the AO was justified in coming to the conclusion that purchases shown in the trading account had been made against payment of cash and the liability in question shown on account of alleged credit purchases was on account of cash credits introduced by the assessee from its own unknown sources and therefore, the AO was quite justified in proceeding to verify the genuineness of the same in exercise of powers vested under section 68 of the Act.

11. I am further of the opinion that the assessee has also failed to establish the genuineness of the liability being on account of cash credits also, the AO was justified in taxing the same as assessee's income from undisclosed sources having been introduced in the books of account in the garb of credit purchases.

12. So far as the decisions relied upon by the ld. A.R. are concerned, I am of the opinion that–

(i)	The decision of Hon'ble Allahabad High Court in the case of Pancham Pass Jain (supra)
	This decision is 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. It was in view of these facts that the Hon'ble High Court held that provisions of section 68 were not applicable to the liability appearing on account of credit purchases.
	So far as the present case is concerned, the Revenue's case, from the very beginning, was that 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 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. Consequently, with respect I am of the opinion that the decision of the Hon'ble jurisdictional High Court (supra) is not applicable to the present case and is of no help to the assessee.
(ii)	The decision of the I.T.A.T., Lucknow Bench in the case of Ha Singar Gutkha (P.) Ltd. (supra)
	This decision is distinguishable from the present case on facts itself and therefore, is not applicable to the present case. In the case before the Hon'ble Tribunal, the assessee's claim that the liability in question was on account of credit purchases stood accepted by the revenue and it was in view of these facts that the Hon'ble Tribunal followed the decision of Hon'ble Allahabad High Court in the case ofPanchan Dass Jain (supra).
	In the present case , the assessee having failed to establish that the liability in question was on account of credit purchases, the aforesaid decision of the Tribunal, in my opinion, is not applicable and is of no help to the assessee.
(iii)	The decision of the Hon'ble I.T.A.T., Allahabad Bench in the case of Mathura Das Ashok Kumar(supra)
	This decision is also not of any help to the assessee because in this case, though the assessee was purchasing sarees from karigars on credits against an instrument called 'purja' but had maintained the complete records of purjas so issued in 'Jama Jakar Bahi' and at the time of hearing had established the fact that the liability in question was on account of credit purchases from the karigars to whom purjas were issued. Since the assessee had maintained complete details as to the purchases on credits, details of karigars and purjas, the Tribunal, in my opinion, was justified to accept the liability as on account of credit purchases but so far as the case before us is concerned, it is an admitted fact that the assessee has neither claimed nor has furnished any evidence for having maintained such record, rather has, time and again, claimed that, maintenance of such record, is unwarranted. In view of these facts, I am of the opinion that this decision is of no help to the assessee.

13. In view of the above discussion, I am of the opinion that the CIT(A) was not justified in deleting the addition of Rs. 10,78,71,656. The order of the CIT(A) on this point is, therefore, reversed and the addition is sustained.

14. With respect to findings, on all other issues, I concur with the order of ld. Brother (A.M.).

15. In the result, revenue's appeal is partly allowed and assessee's Co. is allowed for statistical purposes.

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

Since there is difference of opinion between the Members constituting the Bench, who have heard these matters, therefore, the following point of difference is being formulated for nomination of Third Member as envisaged under section 255(4) of the Act by the Hon'ble President, Income-tax Appellate Tribunal.

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

THIRD MEMBER ORDER

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. CIT(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 inasmuch as that the goods to the extent of these amounts are accepted to be received, purchased 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 by 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	10,78,71,656 -
	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 80G 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 lakhs	427.14 lakhs	6.75%
	2004-05	6,223.18 lakhs	617.39 lakhs	9 .92%
	2005-06	5028.23 lakhs	607.85 lakhs	12.09%"

3. The only issue for consideration by me is with regard to the addition on account of sundry creditors relating to raw hide supplier aggregating to Rs. 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 Complex 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 Mani	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 creditworthiness 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 identity 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 lakh 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 25.07.2004 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 purchase 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 order 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 made 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 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 (Goat)
	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 paperbook 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 postal address of the suppliers is care of those mandis. It is nobody'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 paras 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 of 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. 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 AY 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 confirmations 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 therefrom 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, be 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, inasmuch 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 purchases 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 book 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.) 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. CIT(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 2006-07 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 ofK.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 R.B. Jessaram Fatechand (Sugar Deptt.) v. CIT [1970] 75 ITR 33 (Bom.) 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 "ongoing business" the same facts in the assessment of the subsequent year, which supports explanations and business records of the appellant on this issue to be 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 gazette from time to time. 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 pages 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 Taxman 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 [2007] 295 ITR 268/[2008] 170 Taxman 301 (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, ld. DR referred to the decision relied by assessee in the case ofVisisth Chay Vyapar Ltd. v. ITO, decided by Delhi 'G' Bench in ITA Nos. 2835, 2838, 2836 & 2837/Delhi/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 (SC), wherein Hon'ble Supreme Court held as per headnote 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 paras 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 superstructure of disagreement by ld. J.M. stands. Ld. Counsel submitted that reading of assessment order for A.Y. 2005-06 particularly paras 10 & 11 on pages 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 unverifiability 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 unpaid sundry creditors, is contained. Further, records of 20 vendors in respect of purchases of raw hide, payment made and unpaid 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 paras 10 & 11 of assessment order at pages 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 Mandiwise 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 A.Y. 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 care of Mandi and are made available as and when required.
(b)	Insofar 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 number of vendors do have faith in assessee-company to supply hide on credit.
(c)	Insofar 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 ofPancham Dass Jain (supra)

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 facts. 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.'s case (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 account 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 ld. 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 assessment 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 unexplained 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-alone 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 inasmuch 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 withholding 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 letterhead 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 raw hides 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 goat 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 manoeuvring 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 goats would be taken @ 101.52 in place of Rs. 94.21 as shown. By adopting this rate of goat skin as on 31.3.2005, the value of closing stock of goat skin as on 31.3.2005 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 explaining the modus operandi of purchases being effected by it as noted in paras 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 whereabout 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 unsatisfactoriness 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 identity 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 pages 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 paras 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. 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 setaside the assessment".

33. It is seen that the AO 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 R.B. Jessaram Fatechand (Sugar Deptt.) (supra) 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 M. Durai Raj v. CIT [1972] 83 ITR 484 (Ker.)'.

14.12 Thus, the verification part of the sundry creditors also stand duly met and, therefore, the findings of ld. J.M. contained in paras 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. Annamkuty 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 case (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 guesswork. 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 guesswork 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 in Pancham 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.