Best judgment assessment and cash credit proof fail where trading addition lacks basis and affidavit evidence is uncorroborated.

Rejection of books under section 145(3) was justified because the assessee had no stock register, no verifiable inventory record, and defective purchase vouchers, but the trading addition could not be sustained without a reasonable basis for estimating escaped income, so it was deleted. A cash credit under section 68 was not proved by incomplete affidavits alone, as identity, creditworthiness, and genuineness require corroborative material; the addition was therefore deleted. A separate disallowance under section 40A(3) for cash payment was also deleted because the purchase was on trading account and the trading results had already been estimated after rejection of books.

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Issues: (i) Whether rejection of books of account and the trading addition sustained on that basis were justified; (ii) Whether the addition under section 68 for unexplained cash credits was sustainable; (iii) Whether the disallowance under section 40A(3) for cash payment was sustainable.

Issue (i): Whether rejection of books of account and the trading addition sustained on that basis were justified.

Analysis: The assessee did not maintain a stock register, had no verifiable inventory record, and the purchase vouchers and trading details were found defective. In these circumstances, invocation of section 145(3) was justified. However, rejection of books does not by itself mandate an addition. Any estimate of escaped income must rest on a reasonable basis, and the material on record did not provide a defensible basis for sustaining the trading addition.

Conclusion: The trading addition was deleted and the issue was decided in favour of the assessee.

Issue (ii): Whether the addition under section 68 for unexplained cash credits was sustainable.

Analysis: The credits were supported only by affidavits that were incomplete and unsupported by addresses, dates, mode of payment, or corroborative evidence. Section 68 requires the assessee to prove identity, creditworthiness, and genuineness on the basis of material on record, and a bare affidavit does not, by itself, establish a credit. Nevertheless, the assessee stated that the deficiencies in the affidavits had been cured, the amount involved was small, and the matter was not remanded for further verification.

Conclusion: The addition under section 68 was deleted and the issue was decided in favour of the assessee.

Issue (iii): Whether the disallowance under section 40A(3) for cash payment was sustainable.

Analysis: The payment was admittedly made in cash, and the transaction did not fall within the exceptions in Rule 6DD. However, the purchase was on trading account and the trading results had already been estimated after rejection of books under section 145(3). In those circumstances, the disallowance under section 40A(3) could not be separately sustained.

Conclusion: The disallowance under section 40A(3) was deleted and the issue was decided in favour of the assessee.

Final Conclusion: The assessment additions and disallowance were set aside, resulting in complete relief to the assessee.

Ratio Decidendi: Rejection of books permits best judgment assessment, but a trading addition must still rest on a reasonable basis; a credit under section 68 must be proved by substantive material, not by affidavit alone; and a separate disallowance under section 40A(3) cannot be sustained where the trading result itself has already been estimated after rejection of books.

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