ORDER In this group of appeals, five appeals are filed by Revenue and four cross-appeals are filed by assessee. four appeals by Revenue as well as assessee relate to asst. yrs. 19 97-98, 19 98-99, 19 99-2000 and 2000-01 respectively. Revenue s appeal bearing ITA No. 4 19 /Coch/2006 is for asst. yr. 2002-03. issues and facts are common and identical in all appeals and also interlinking. Hence, all these appeals were heard together and are being disposed off by this common order for sake of convenience. 2 . Revenue has taken following effective grounds, which are common in asst. yrs. 19 97-98 to 2000-01 : "2. learned CIT(A) erred in holding that funds from sale of goods are available with assessee for subsequent purchases and only peak of purchases are to be considered for addition. 3. learned CIT(A) ought to have noted that case of AO is that assessee had made payments in respect of credit purchases from out of unaccounted income which should be brought to tax. He ought to have seen that AO did not doubt availability of fund but found that assessee has unaccounted cash to pay off creditors and hence it constituted unaccounted income. 4. learned CIT(A) should have noticed that necessity to work at peak credit comes only when additions are made in respect of unexplained cash credits. Where source is suspected, which is not case here and hence resort to peak credit is unwarranted in present case." As far as for asst. yr. 2002-03 is concerned, Revenue has taken following two effective grounds : "2. learned CIT(A) erred in holding that addition on account of bogus credits was without any material foundation. 3. learned CIT(A) ought to have appreciated that cash payments were acknowledged by sellers in writing and hence credit entries for such purchases were bogus." 3. As far as assessee s appeals for asst. yrs. 19 97-98 and 19 98- 99 are concerned, assessee has taken ground challenging reassessment proceedings initiated by AO under s. 147 of Act. Shri V. Ramachandran, learned senior counsel for assessee submitted that assessee is not pressing grounds on issue of validity of reassessment proceedings under s. 147 but pressing other grounds. As assessee is not pressing grounds on validity of reassessment proceedings, more particularly grounds (a), (b) and (c) in both appeals for asst. yrs. 19 97-98 and 19 98-99, same are dismissed as not pressed. 4 . only effective grounds remain for our consideration, which are common in all appeals of assessee are as under : "(d) CIT(A) erred in confirming finding of assessing authority that appellant has made cash purchases outside books and that cost of such purchases can be treated as undisclosed income of appellant. (e) CIT(A) erred in holding that requirements of s. 69C have been complied with. (f) CIT(A) erred in confirming finding of assessing authority that credits in name of suppliers of herbal oils are not genuine. (g) finding of CIT(A) that books of account of appellant are not correct and complete and are liable to be rejected is opposed to facts and is totally untenable. (h) CIT(A) erred in holding that peak of daily total purchases during different assessment years represents undisclosed income of appellant. He erred in coming to conclusion that highest peak of alleged gross unexplained expenditure appearing in year 19 97-98 is liable to be assessed." 5. As far as Revenue s appeals are concerned, only common issue emerges for our consideration in appeals for asst. yrs. 19 97-98 to 2000- 01 and asst. yr. 2002-03 is whether CIT(A) after concurring with findings of AO that assessee has made purchases from up-country suppliers in respect of herbal items by making cash payment on date of purchase but at same time sustaining addition made by AO in asst. yr. 19 97- 98 at Rs. 3,30,670 in place of Rs. 4,92,943 and deleting entire addition for asst. yrs. 19 98-99, 19 99-2000, 2000-01 and 2002-03. 6. As far as assessee s appeals are concerned in respect of asst. yr. 19 97-98, assessee has challenged sustenance of addition made by CIT(A) and as far as asst. yrs. 19 98-99 to 2000-01 are concerned, assessee has challenged findings of first appellate authority that AO has rightly held that assessee has made cash purchases outside books relying on assessee s own bought note and therefore requirements of s. 69C were complied with. 7 . After analyzing issues before us, we give brief facts, which are common in all appeals as under : 7.1 assessee is firm which is engaged in business of trading in essential oils, synthetic perfumes, herbal extracts used by soap manufacturers, etc. Dy. Director if IT (Inv.), Ernakulam conducted survey under s. 133A of Act in business premises of assessee on 5th April, 2002. It was noticed during course of survey that assessee has shown purchases of herbal oil such as Vertvert oil, lemon grass oil, certain herbal items like Koduveli, wild Ginger, etc. entirely on credit basis. All suppliers were shown as individuals belonging to remote and interior places and only names and places of suppliers were shown. It was seen that purchases were supported only by assessee s own bought note. AO was of opinion that payments in respect of said purchases to sellers were made at time of purchases. As per books of account, it was noticed by AO that at time of purchase of said materials, it was not seen that any payment is made to suppliers who, as per AO, were hailing from far off and interior places and entire value of purchases was shown as liability in books of account of assessee. On verification of books of account, it was further seen that assessee had written off said credit purchases by showing cash payment but no receipts in respect of cash payments were available with assessee. AO verified bought notes with assessee and he noted that there was no correct and identifiable postal address as those suppliers though all those suppliers as per AO were one time suppliers hailing from remote up country places. AO also noted that on examination of bought notes payments are made at time of purchase and acknowledgement of same was seen having received payment on bought notes. Moreover, though assessee has paid amount on date of purchase of said material, full amount paid on date of purchase was not reflected in books of account, but assessee has shown said payments on credit basis. It is further found by AO that subsequently when assessee has claimed to have made payments to those up country suppliers, no receipts were obtained from them in respect of payments made by assessee on account of purchase of said herbal items. 7 . 2 AO asked assessee to furnish correct and complete addresses of creditors, but assessee informed that correct and complete addresses of those parties were not available. assessee contended that all transactions were genuine transactions and as per trade practices in this business, it was common method that purchases of said material were made from up country sellers on basis of bought notes n d payments were made subsequently. AO was not satisfied with explanation of assessee. AO was of opinion that as assessee failed to prove fully identifiable postal addresses of those parties that means assessee has failed to prove identity of creditors. AO placed his full reliance on bought notes and came to conclusion that though purchases are shown on credit basis, in fact, payments in respect of those purchases were made at time of purchases itself. AO also noted that alleged payments to those suppliers were made by assessee even after period of more than 10 months. AO was of opinion that it is very difficult to believe that one time supplier would make sale on credit basis for such long period. AO was, therefore, of final opinion that assessee made cash payments to suppliers at time of purchases itself and those payments have not been passed through assessee s accounts. AO was also of opinion that liabilities in respect of purchases shown by assessee in names of suppliers were bogus. He, therefore, made additions on reason that cost of purchases of herbal oil and other materials was treated as met out of assessee s unaccounted income. AO also rejected assessee s contention for exclusion of opening balance as AO noted that entire credits are introduced during year only. summary of additions made to income of assessee is as under : Assessment Addition on account of S.No. year unaccounted expenditure 1. 19 97-98 Rs. 4,92,943 2. 19 98-99 Rs. 1,42,530 3. 19 99-2000 Rs. 4,00,260 4. 2000-01 Rs. 25,16,916 5. 2002-03 Rs. 3,59,741 7.3 assessee challenged impugned orders of AO before first appellate authority. As far as asst. yrs. 19 97-98 to 2000-01 are concerned, CIT(A) concurred with invoking of s. 69C by AO holding that AO has rightly invoked s. 69C by giving following reasons : "(iii)(a) As regards correctness of additions made, appellant has relied on decision of Kerala High Court. In case of C.M. Francis & Co. (P) Ltd. vs. CIT ( 19 70) 77 ITR 449 (Ker). In that case issue was whether there was any material or evidence to show that there was inflation of purchases. In absence of any material, Kerala High Court held that addition cannot be made merely on account of fact that purchases were evidenced only by own bought notes. This decision is distinguishable from that of appellant because in appellant s case there is discrepancy between own bought notes which indicate that purchasers were paid for in cash in full and books of account which showed that there were credit balances even though brought notes had indicated full payment for purchases. In view of this discrepancy AO was justified in making additions discussed in assessment. (b) Another decision relied on by appellant is that of M. Durai Raj vs. CIT ( 19 72) 83 ITR 484 (Ker). In this decision, Kerala High Court held that absence of particulars of addresses of customers in sales will not affect correctness of appellant s accounts. In case of appellant, issue is not with regard to sales but with regarded to purchases. Further, there is discrepancy between purchase vouchers and books of account. In facts of case, therefore, said decision is distinguishable. Another decision relied on by appellant is that in case of R.B. Jessaram Fatehchand (Sugar Dept.) vs. CIT ( 19 70) 75 ITR 33 (Bom), in this particular case, Kerala High Court held that books of account cannot be rejected merely there was low rate of profits or because of absence of particulars of addresses of customers for verification of sales or non-maintenance of stock book on basis of weight. This decision is also distinguishable for same reasons discussed above. Therefore, decisions relied on by appellant against additions under s. 69C are not tenable. (iv) appellant has also relied on order of Tribunal, Cochin Bench dt. 16th March, 19 97 in case of Sri Krishna Store. In ITA No. 468/Coch/ 19 91 for asst. yr. 19 87-88. I find that this decision is distinguishable because in that case Tribunal has held as under : learned counsel for assessee summed up his arguments contending that assessee s books of account were neither challenged nor disputed version emerges out of books of account must prevail over mere presumptions and surmises of AO. rubber stamp paid appearing on certain paper slips does not lead us to draw inference that assessee did not have any liability towards purchase made on credit. In our opinion, presumptions made by AO in this regard are not beyond doubt. preponderance of probabilities go in favour of QS8esalle. Therefore, we are in agreement with conclusion reached by CIT(A) that addition made by AO is not sustainable since it has no legal or factual basis. I find that appellant s case is distinguishable from above case on facts. In appellant s case purchase vouchers contained signatures of suppliers acknowledging full payment in cash while there were credit balances in books of account. This factual discrepancy has not been clarified by appellant. Hence, this claim of appellant based on above order is rejected. Regarding scope of s. 69C, appellant has relied on decision of J.B. Parkar vs. V.B. Palekar ( 19 74) 94 ITR 616 (Bom). In that case Bombay High Court has held that burden of establishing necessary ingredients for application of ss. 69A, 69B, 69C lies on Department. There is no dispute about this position of law. AO has held that appellant had made cash purchase outside books relying on appellant s own bought notes and therefore requirements of s. 69C were complied with. Hence, objections of appellant in this regard are rejected." 7 . 4 In respect of quantum of addition, CIT(A) held that assessee was making purchase of herbal oil out of his funds outside books of account, but at same time taking into account fact that funds from sale of goods are available with assessee for subsequent purchases and hence only peak of purchase should be considered for addition. CIT(A) worked out peak of purchase for different assessment years as under : S.No. Assessment year Peak of purchases 1. 19 97-98 Rs. 3,30,670 2. 19 98-99 Rs. 1,35,540 3. 19 99-2000 Rs. 1,54,110 4. 2000-01 Rs. 2,04,050 CIT(A) sustained peak of purchases of Rs. 3,30,670 in asst. yr. 19 97-98 under s. 69C; but as far as for asst. yrs. 19 98-99 to 2000-01 are concerned, he was of opinion that peaks for these assessment years are lower and hence there is no scope for addition in those years and thus deleted additions. reasonings of above finding of CIT(A) are as under : "The suppliers of herbal oil approach appellant with goods. suppliers are located at far away places from business premises of appellant. suppliers are generally not able to keep credit balance with appellant. supplies of goods are seasonal. bought notes maintained by appellant show that suppliers have been paid in cash in full. books of account of appellant show that there are credit balances in names of suppliers. It is seen that there is obvious anomaly between books of account maintained by appellant and appellant s own vouchers indicating purchase of goods from suppliers. There cannot be two contradictory entries in respect of same transaction. Therefore, I hold that books of account of appellant are not correct and complete and are hence liable to be rejected. It is done so. own bought notes show that relevant payments have been made on dates of purchase themselves. Under these circumstances, it is held that appellant has been making purchases of herbal oils out of its funds outside books of account. Taking into account fact that funds from sale of goods are available with appellant for subsequent purchases, only peak of purchases are considered for addition. peaks of purchases for different assessment years are as under : 19 97-98 Rs. 30,670 19 98-99 Rs. 1,35,540 19 99-2000 Rs. 1,64,110 2000-01 Rs. 2,04,050 In view of fact that highest peak appears in asst. yr. 19 97-98, addition of Rs. 3,30,670 under s. 69C is sustained for that year. Since peaks for subsequent years are lower, there is no scope for any addition in subsequent years. Hence, addition made for asst. yrs. 19 98-99 to 2000-01 are deleted. At this stage I have to clarify that peaks of unexplained expenditure in asst. yrs. 19 98-99 to 2000-01 are held to be not assessable. In these assessment years for only reason that reopening for asst. yr. 19 97-98 has been held to be valid and highest peaks of unexplained expenditure appearing in that year has been directed to be assessed therein." 7.5 Being aggrieved by deletion of addition for asst. yrs. 19 97- 98 to 2000-01 and 2002-03, Revenue is in appeal before us and assessee being aggrieved by sustenance of addition for asst. yr. 19 97-98 to Rs. 3,30,670 and also on findings of CIT(A) that AO has rightly invoked s. 69C for making additions in respect of up country purchases of herbal items, which is in asst. yrs. 19 97-98 to 2000-01. 8. We have heard learned senior Departmental Representative, Shri V. Sreekumar, for Revenue and learned senior counsel, Shri V. Ramachandran, for assessee. argument of learned Departmental Representative can be summarized as under : In respect of addition on account of purchase transactions relating to herbal items, it was argued that most of suppliers are Tribunal having insignificant source of income and it cannot be believed that they will go back without taking money in respect of sale of herbal product which are forest product. It is further argued that on preponderance of probabilities no such type of commercial transaction can be presumed. entire purchases are recorded on basis of bought notes of assessee and on bought note seller has acknowledged payment on date of sale. In respect of applying theory of peak credit by CIT(A) in asst. yrs. 19 97-98 to 2000-01, learned Departmental Representative argued that said method for giving relief to assessee is totally misplaced as CIT(A) has himself concurred with findings of AO that assessee has made payment to sellers on date of supply of herbal product. So there was no reason to go on theory of peak credit. learned Departmental Representative supported order of AO. 9. Per contra, learned senior counsel vehemently submitted that there was survey action in business premises of assessee and no incriminating material was found. opinion of AO that no seller will go back without taking price from buyer is totally on surmises as AO has not brought on record any evidence to show that such opinion is true, there is no room for presumptions and surmises in taxing statute. It is further argued that up country sellers of herbal items are not registered dealer under ST Act, nor they are maintaining any books of account and this is conventional commercial practice in this line of trade that this forest products collected season-wise and as sellers have no arrangement for storing same, same are sold to perfume oil manufacturers. It is not case of AO that purchase transactions are bogus but AO is revoking s. 69C of Act, which is rule of evidence. There is primary burden on AO to prove that such payment was made on date of purchase. AO has not taken up pains even to examine single seller. AO made reliance on bought note, which is totally misplaced as bought notes are printed format. Moreover, assessee is in this line of business for last 2/3 decades and particular trading system is followed which was never objected by Revenue in past, though in respect of many different assessment years assessments were framed under s. 143(3) of Act. In respect of peak credits on basis of which CIT(A) sustained addition in asst. yr. 19 97-98, learned senior counsel vehemently argued that in fact s. 69C is wrongly invoked and there is no justification for adopting theory of peak credit. theory of peak credit adopted by CIT(A) is totally misplaced on fact that no addition can be sustained at all by invoking s. 69C of Act. 1 0 . We have heard rival submissions of parties. We have also considered facts as per materials placed before us. assessee has filed paper book containing copies of bought notes. In this case it is not disputed that assessee is engaged in business of trading essential oils, synthetic perfumes, herbal extracts used by soap manufacturers etc. For that purpose, assessee is required to purchase some herbal and forest product. There was survey action in business premises of assessee and after survey action, AO initiated proceedings under s. 147 of Act for asst. yrs. 19 97-98 and 19 98-99 and in respect of asst. yrs. 19 99-2000, 2000-01 and 2002-03 regular assessments are made under s. 143(3) of Act. It was noticed by AO that suppliers of assessee firm were individuals and they were from remote and interior places and only assessee showed name and place of suppliers. Moreover, purchases were only supported b y assessee s own bought notes. AO place reliance on bought notes, which are in printed form, and on which suppliers put their initials only. grievance of AO is that though assessee has made cash payment to those suppliers on date of purchase, same was shown on credit and payment was shown as deferment. It is further case of AO that when subsequently assessee has made payment, no receipts are obtained. We have examined copies of bought notes, which are placed in paper book filed by assessee. It is seen that said bought notes are in printed form and there is signature of person who has sold said herbal product to assessee. There is printed line that we have received payment. There is no signature. argument of learned counsel is that being printed format, it is appearing in all bought notes. Moreover, assessee follows this practice for more than 2/3 decades and Revenue had no objection and this is consisting commercial practice in this particular line of business. 11. We find force in contention of learned counsel. It is seen that survey action under s. 133A was also went against assessee and at time of survey nothing was found. Though AO has made certain observation in respect of suppliers, that cannot be base as books of account are maintained by assessee during regular course of business and unless and until some incriminating additional material is found to show that transactions recorded in said books of account are not believable or not genuine, then only entries can be discarded. In this case, nothing was found in course of survey action. presumptions and surmises have no room under taxing statute, as rightly argued by learned counsel for assessee. proceedings before AO and first appellate authority are quasi judicial proceedings and it should be based on some material and proper reasons and finding should not be based on mere opinion, which are on surmises and presumptions. In our opinion if this is consistent commercial practice followed by assessee and nothing has been found during course of survey action under s. 133A, AO as well as CIT(A) was not justified at all in disbelieving commercial practice in this line of business. 12. AO has invoked s. 69C in respect of this transaction for making addition. Sec. 69C reads as under : addition. Sec. 69C reads as under : "Where in any financial year assessee has incurred any expenditure and he offers no explanation about source of such expenditure or part thereof, or explanation, if any, offered by him is not, in opinion of AO, satisfactory, amount covered by such expenditure or part thereof, as case may be, may be deemed to be income of assessee for such financial year : Provided that notwithstanding anything contained in any other provision of this Act, such unexplained expenditure which is deemed to be income of assessee shall not be allowed as deduction under any head of income." 13. It is not case of AO that cash payments shown by assessee in books of account and assessee failed to give any explanation in respect of source. From plain reading of s. 69C, it is normal rule of evidence and presumption that where assessee in fact incurred certain expenditure and is not able to offers any satisfactory explanations, then AO can draw inference that expenditure of unaccounted part thereof must have been made out of undisclosed income of previous year. Moreover, legislature has used word "may" and not "shall", but at same time there must be some material fulfilling ingredients of s. 69C. learned counsel brought to our notice that earlier assessments under s. 143(3) are framed and assessee is consistently following this practice in this line of business. Therefore, in our considered opinion findings of AO as well as CIT(A) that s. 69C is applicable to facts of this case are not sustainable. AO as well as CIT(A) has drawn conclusion in respect of bogus unaccounted payment to creditor only on basis of regular books of account which were impounded after survey. We are therefore of considered opinion that on facts in this case s. 69C is not applicable and there is no question of making addition by adopting theory of peak credit. CIT(A) has not sustained any addition for asst. yrs. 19 98-99, 19 99- 2000, 2000-01 and 2002-03. Hence, applicability of s. 69C is decided in favour of assessee in respect of purchase transactions of herbal product by assessee from up country sellers and against Revenue. 14. In result, all appeals of Revenue stand dismissed and appeals of assessee are partly allowed. *** ASSISTANT COMMISSIONER OF INCOME TAX v. K.H. DHAMDHERE