JUDGMENT

R.V. Easwar, J.:

By order dated 10.10.2009 the following substantial question of law was formulated and admitted by a Division Bench of this Court:

"Whether the Ld. ITAT erred in deleting addition under Section 41(1) of Rs.1,25,46,534/- on account of non-genuine creditors?"

2. The brief facts giving rise to the present appeal filed by the revenue under Section 260A of the Income Tax Act, (`the Act' for short) may be noticed. The assessee is a company engaged in the manufacture of rice from paddy and also selling rice after purchasing the same from the local market. We are concerned in this appeal with the assessment year 2002-03. In the course of the assessment proceedings, the Assessing Officer wanted to verify the sales made by the assessee on consignment basis to 6 parties of Naya Bazar, Delhi. The total sales shown by the assessee to these parties amounted to Rs.3,40,12,459/-. While verifying the sales and the sundry debtors shown by the assessee in its books of accounts as on 31.3.2002, which is the last day of the accounting year, the assessing officer also wanted to verify the sundry creditors shown in the books of accounts as on the said date. This was because he took the view that if the consignment sales were not genuine, the purchases shown to have been made by the assessee on credit basis cannot be treated as genuine. He, therefore, called upon the assessee to submit consignment letters from the sundry creditors who were 10 in number (list of sundry creditors given at page 8 of the assessment order). The total amount due to the 10 sundry creditors on account of purchase of paddy was Rs. 1,31,17,230/-. The assessee did not submit the confirmation letters, but wrote to the assessing officer on 18.1.2005 that it was not aware of the present whereabouts of the creditors after a lapse of four years and whatever addresses were available with the assessee had been given by the suppliers at the time when the assessee purchased paddy from them. The assessee was however able to file the confirmation letter from Shri Vardhman Rice Industries Pvt. Ltd. in whose account the assessee showed a credit balance of Rs.5,70,696/-.

3. In the aforesaid background, the assessing officer was of the view that the assessee was not interested in proving the genuineness of the creditors by filing confirmation letters or by giving the necessary information. In this view he held that the creditors were not genuine and there was no genuine outstanding in their accounts. He accordingly added Rs.1,25,46,534/- which represented the credit balances in the accounts of 9 parties, excluding Shri Vardhman Rice Industries Pvt. Ltd. who had filed confirmation letter. The Assessing Officer specifically noted that the amounts were being treated as unexplained credits in the books of accounts under Section 68 of the Act since the liabilities were not proved by the assessee. In the computation of the income also the addition was made with the narration "addition on account of unconfirmed credits as discussed above".

4. The assessee filed an appeal against the aforesaid addition before the CIT (A) and in the grounds of appeal, took the point that the addition made under Section 68 of the Act was contrary to facts and law and that since the creditors were old balances the assessing officer was wrong in treating them as income of the assessee for the year under consideration. It was further pointed out that since the liability still existed in the books of accounts, the same cannot be treated as income. Before the CIT (A) the assessee also filed a letter dated 10.1.2006 in response to the opportunity given by the CIT (A) and informed him that since the creditors were not cooperating, the assessee was unable to give their PAN numbers and since they were demanding their dues, the CIT (A) may issue summons to them for getting their confirmations and PAN numbers.

5. The CIT (A) did not accept the assessee's submissions. According to him the assessee