Facts of the case

• The assessee was a proprietor engaged in wholesale trading. During scrutiny, AO noticed sundry creditors of significant amount.
• Notices u/s 133(6) were issued to major creditors, they were either returned unserved or not complied with. Inspector deputed by AO also failed to trace them.
• AO held that genuineness of purchases (difference between opening & closing creditors) was not proved & added the amount to income. CIT(A) sustained the addition, holding that assessee failed to establish genuineness of creditors as PAN details were inconsistent & Inspector reported non-existence of parties.

Arguments of the Appellant (Assessee)

1. Confirmations, PAN, VAT registration, sales tax records, ledger copies & bank statements of all three creditors were furnished.
2. Purchases were duly recorded & payments made through banking channels.
3. AO himself accepted sales & corresponding purchases; without purchases such sales could not exist. The assessee further argued that once purchases are accepted, creditor balances cannot be added merely due to non-response.

Arguments of the Respondent (Revenue)

1. The AO observed that there is mismatch of PAN numbers declared by the assessee.
2. The main parties from whom assessee has purchased were not found in the addresses given by the assessee, the AO on deputation of Inspector from his office could not trace and extract the information from these parties. Accordingly, he came to the conclusion that the purchases are bogus and proceeded to make an addition being difference between opening and closing sundry creditors.

Decision of the Court

• In case the AO is doubting the genuineness of the transactions, he should have rejected the whole purchases made by the assessee during the year rather making the addition only the difference of opening and closing sundry creditors.
• It shows that the AO has completed the assessment without application of mind and made the addition on the gross basis.
• Without there being purchases, the assessee would not have achieved such huge sales. The AO has accepted the sales and made the addition on the genuineness of the purchases by adding in such gross manner.
• Therefore we are inclined to delete the addition proposed by the AO and allow the grounds raised by the assessee.

Significant takeaways from judgment

• Once the AO has accepted sales as genuine, the AO cannot reject the purchases.
• Rejection of evidence solely on the ground of non-receipt of replies is unjustified, especially when the transactions were fully accounted for, confirmed, and payments were made through proper banking channel.