Accepted Contract Receipts, Accepted Purchases: ITAT Deletes Entire Bogus Purchase Addition

ACIT Vs Rajesh Manuprasad Trivedi (ITAT Mumbai)

Accepted Contract Receipts, Accepted Purchases: ITAT Deletes Entire Bogus Purchase Addition

In a significant relief to a civil contractor, the Mumbai ITAT deleted the entire addition made on account of alleged bogus purchases, holding that once contract receipts are accepted and execution of work is undisputed, the corresponding purchases cannot be treated as income merely on suspicion or third-party statements.

The assessee, engaged in civil construction work for Government and Semi-Government authorities, had purchased materials from concerns allegedly linked to accommodation entry provider Naresh A. Hirani. Based on investigation reports and statements recorded from Hirani, the Assessing Officer treated purchases aggregating to ₹6.86 crore as non-genuine. Though the CIT(A) granted partial relief and restricted the addition to 15% of the disputed purchases, both the assessee and Revenue carried the matter in appeal.

The Tribunal noted that the assessee had furnished purchase invoices, confirmations, PAN details, income-tax acknowledgements, ledger accounts and bank statements evidencing payments through banking channels. More importantly, the Department had accepted the contract receipts and had not disputed execution of the works. There was also no evidence of any cash being received back by the assessee against payments made to suppliers.

The ITAT observed that while the circumstances relied upon by the AO justified scrutiny, they could not justify treating the entire purchases as income when the materials were admittedly consumed in execution of contracts. The assessee had already disclosed a healthy gross profit rate of 24.70%, and any further estimated addition would result in unrealistic profitability. Holding that the disclosed profits adequately covered any possible inflation in purchases, the Tribunal deleted even the 15% addition sustained by the CIT(A).

The Tribunal also upheld deletion of the ₹3.75 crore addition under Section 68 on account of sundry creditors, observing that trade creditors arising from purchases cannot automatically be treated as unexplained cash credits. Further, it restricted the Section 14A disallowance to the actual exempt dividend income of ₹58,229, instead of the disallowance of ₹9.88 lakh computed under Rule 8D.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

The aforesaid appeals pertain to Assessment Years 2015-16 and 2016-17 and arise out of the appellate orders passed by the learned Commissioner of Income Tax (Appeals), Pune-11, Pune, in relation to assessments framed under section 143(3) of the Income Tax Act, 1961. For Assessment Year 2015-16, the assessee is in appeal against the order of the learned CIT(A) whereby the addition made on account of purchases and the disallowance under section 14A have been sustained. For Assessment Year 2016-17, there are cross appeals arising out of the common order dated 29.07.2024 passed by the learned CIT(A), Pune-11, Pune. The Revenue has preferred ITA No.2111/PUN/2024, whereas the assessee has preferred ITA No.5037/Mum/2024. Since the issues involved in these appeals arise from a common factual background, are substantially interlinked and were argued together, the same are being disposed of by this consolidated order.

2. The assessee is engaged in the business of civil construction and execution of contract as well as sub-contract works, mainly for Government and Semi-Government authorities. The principal controversy in these appeals relates to additions made by the Assessing Officer on account of purchases treated as non-genuine. In Assessment Year 2016-17, the Assessing Officer made an aggregate addition of Rs.6,86,31,181/-, comprising purchases of Rs.6,05,16,039/- from eight concerns stated to be connected with Shri Naresh A. Hirani and purchases of Rs.81,15,142/- from M/s Maricia Infratech and M/s A.S. Enterprises. The learned CIT(A) restricted the said addition to Rs.1,02,94,680/-, being 15% of the disputed purchases. The Revenue is aggrieved by the relief granted by the learned CIT(A), whereas the assessee is aggrieved by the sustenance of addition to the extent of 15%. Apart from this, the Revenue has challenged deletion of addition of Rs.3,75,11,202/-made under section 68 on account of sundry creditors, whereas the assessee has challenged the confirmation of disallowance of Rs.9,88,358/- under section 14A read with Rule 8D. In Assessment Year 2015-16 also, the assessee has raised issues relating to addition on account of purchases and disallowance under section 14A.

3. During the course of assessment proceedings, the Assessing Officer received information from the Investigation Wing and from the office of ACIT, Circle-32(1), Mumbai, pursuant to survey and enquiry proceedings conducted in the case of Shri Naresh A. Hirani and certain concerns allegedly controlled or operated by him. As per the said information, Shri Naresh A. Hirani was stated to have admitted that concerns operated by him were engaged in providing accommodation purchase bills without actual supply of goods. On the basis of this information, the Assessing Officer noticed that the assessee had claimed purchases from concerns stated to be belonging to or controlled by Shri Naresh A. Hirani group. For Assessment Year 2016-17, purchases from eight such concerns were quantified at Rs.6,05,16,039/-. These concerns were M/s Anraj B. Hirani (HUF), M/s Anraj Construction Corporation, M/s Naresh A. Hirani (HUF), M/s Naresh Build Corpo, M/s Naresh Construction Corporation, M/s Shanti Construction Corporation, Khetla Construction & Supplying Company and Abhi Constructions & Supplying Company. Apart from these concerns, the Assessing Officer also examined purchases of Rs.8,75,948/- from M/s Maricia Infratech and Rs.72,39,194/- from M/s A.S. Enterprises, aggregating to Rs.81,15,142/-.

4. The Assessing Officer called upon the assessee to furnish complete details of the purchases. In response, the assessee filed party-wise details including ledger accounts, copies of purchase invoices, confirmations, PAN particulars, acknowledgements of income-tax returns, bank statements evidencing payments through banking channels and other supporting documents. The assessee’s specific case was that all purchases were duly recorded in the regular books of account, payments had been made through account-payee cheques, and the materials so purchased were utilised in execution of contract works. The assessee also submitted that it was executing projects for Government and Semi-Government agencies and the corresponding contract receipts had been accepted by the department. It was further submitted that there was no material on record to show that any cash had been received back by the assessee against payments made to the suppliers.

5. The record shows that the Assessing Officer issued summons under section 131 to the parties connected with Shri Naresh A. Hirani and also issued notices under section 133(6) wherever considered necessary. According to the Assessing Officer, the summons under section 131 were not complied with and the assessee failed to produce the parties. The Assessing Officer, therefore, proceeded on the basis that mere filing of confirmations, invoices, PAN details and banking documents was not sufficient in the light of the statement of Shri Naresh A. Hirani and the information received from the Investigation Wing. The Assessing Officer noted that Shri Naresh A. Hirani had admitted before the Sales Tax authorities and the Income Tax authorities that he was engaged in issuing accommodation purchase bills. He further observed that there was no material to show that Shri Naresh A. Hirani had retracted from his admission. On this premise, the Assessing Officer held that the purchases from the eight concerns connected with Shri Naresh A. Hirani were not genuine and made an addition of Rs.6,05,16,039/-.

6. Insofar as purchases from M/s Maricia Infratech and M/s A.S. Enterprises were concerned, the Assessing Officer deputed the Inspector to conduct field enquiries at the addresses mentioned on the invoices. As per the Inspector’s report, M/s A.S. Enterprises was not found at the given address and local enquiries did not reveal existence of such concern. Similar report was submitted in respect of M/s Maricia Infratech. The assessee was asked to furnish fresh addresses. According to the Assessing Officer, the assessee failed to furnish any effective alternative address or produce the parties. The Assessing Officer, therefore, treated purchases of Rs.81,15,142/- from these two concerns also as non-genuine and added the same. Thus, the total addition on account of purchases for Assessment Year 2016-17 was made at Rs.6,86,31,181/-.

7. Before the learned CIT(A), the assessee assailed the addition both on facts and in law. It was submitted that the Assessing Officer had proceeded substantially on the basis of third-party information and the statement of Shri Naresh A. Hirani, without bringing any direct evidence to show that the assessee had received only accommodation bills or that cash had returned to the assessee against cheque payments. The assessee submitted that all primary evidences were furnished before the Assessing Officer, including confirmations, invoices, ledger accounts, PAN details, income-tax return acknowledgements and bank statements. It was further submitted that in response to notices under section 133(6), several parties had directly confirmed the transactions, and for the remaining parties the assessee had furnished complete documentary support. The assessee also placed a party-wise tabulation showing availability of ITR acknowledgements, confirmations, invoices, bank statements and relevant paper-book references for each party.

8. The assessee’s principal factual contention before the learned CIT(A) was that it was engaged in civil contract work and the materials purchased from the parties were actually consumed in execution of projects awarded by Government and Semi-Government agencies. It was submitted that all purchases were recorded in the books of account, materials were entered in the material inward register and corresponding contract receipts were accepted. The assessee emphasised that such contract work could not have been completed without actual availability and consumption of materials, and that no discrepancy had been pointed out by any Government agency or contract awarding authority in the execution of work. It was further submitted that payments for purchases had been made by account-payee cheques and corresponding receipts from contract work were also through banking channels. According to the assessee, in absence of any evidence of cash-back or any adverse material showing that the goods were not received or consumed, the purchases could not be disallowed in entirety.

9. The assessee also placed before the learned CIT(A) the comparative profitability position. For Assessment Year 2014-15, turnover was Rs.13,31,88,225/-, gross profit was Rs.2,54,33,894/- giving GP rate of 19.10%, and net profit was Rs.52,01,081/- giving NP rate of 3.91%. For Assessment Year 2015-16, turnover was Rs.45,47,18,163/-, gross profit was Rs.8,12,66,277/- giving GP rate of 17.87%, and net profit was Rs.1,95,27,678/- giving NP rate of 4.29%. For Assessment Year 2016-17, turnover was Rs.31,99,89,784/-, gross profit was Rs.7,90,31,159/- giving GP rate of 24.70%, and net profit was Rs.1,19,97,675/- giving NP rate of 3.75%. It was contended that the assessee had already disclosed substantial gross profit and reasonable net profit, and if the entire purchases were disallowed, the resultant profit rate would become commercially unrealistic, especially in the line of civil construction and sub-contract work.

10. The assessee further submitted before the learned CIT(A) that in earlier search-related proceedings in the cases of the assessee and his family members for Assessment Years 2007-08 to 2013-14, the matter had travelled before the Hon’ble Settlement Commission, which accepted the proposition that what could be taxed in such circumstances was the profit element embedded in the disputed purchases and not the entire purchases. The assessee also relied upon the order of the Tribunal dated 16.03.2022 in ITA No.224/Mum/2020 in the case of Shri Mukesh Manuprasad Trivedi, where in similar circumstances the addition was restricted to 4% of purchases. Reliance was also placed on decisions rendered in the context of civil contractors where it has been held that when contract receipts and completion of work are accepted, the entire corresponding purchases cannot be added and, at the highest, only the profit element embedded therein can be considered.

11. The learned CIT(A), after considering the assessment order, statements relied upon by the Assessing Officer, evidences furnished by the assessee and the nature of the assessee’s business, held that the purchases from the concerns connected with Shri Naresh A. Hirani and from M/s Maricia Infratech and M/s A.S. Enterprises were not fully verifiable in the manner claimed by the assessee. The learned CIT(A) took note of the statement of Shri Naresh A. Hirani, non-compliance of summons issued under section 131, non-production of parties by the assessee and field enquiry report in respect of M/s Maricia Infratech and M/s A.S. Enterprises. At the same time, the learned CIT(A) also accepted the assessee’s alternative plea that the entire purchase amount could not be added when the corresponding contract receipts were accepted and execution of contract work had not been disputed. He observed that the turnover disclosed by the assessee had been accepted and the assessee had already shown substantial gross profit. He further observed that if the entire purchase addition was sustained, the resultant GP and NP rates would be abnormally high and not in consonance with the nature of the assessee’s business.

12. The learned CIT(A), therefore, held that the disallowance of 100% of the disputed purchases was not justified and only the profit element embedded in such purchases could be brought to tax. While arriving at this conclusion, he took into account the Settlement Commission proceedings in the assessee’s group cases, the Tribunal’s order in the case of Shri Mukesh Manuprasad Trivedi, the profitability shown by the assessee, the fact that most of the receipts were from sub-contract work and the decisions relied upon by the assessee. However, instead of applying 4% as in the case of Shri Mukesh Trivedi, the learned CIT(A) observed that the facts were distinguishable because in that case the declared net profit rate was higher, whereas in the present case the net profit rate declared by the assessee for Assessment Year 2016-17 was 3.75%. Considering the totality of circumstances, he restricted the addition to 15% of the aggregate disputed purchases of Rs.6,86,31,181/-, thereby sustaining addition of Rs.1,02,94,680/-and deleting the balance addition.

13. The next issue in Assessment Year 2016-17 relates to addition of Rs.3,75,11,202/- made under section 68 in respect of outstanding sundry creditors. During assessment proceedings, the Assessing Officer observed that the assessee had shown balances in the names of various sundry creditors as on 31.03.2016. He called upon the assessee to furnish details such as names, addresses, PANs, purchase bills, delivery challans, stock register and other supporting evidences. According to the Assessing Officer, the assessee did not furnish complete details and certain details were filed only at the fag end of assessment proceedings. He, therefore, treated the closing balances of Rs.3,75,11,202/- in the names of sundry creditors as unexplained cash credits under section 68 and added the same to the income of the assessee.

14. Before the learned CIT(A), the assessee challenged the addition by submitting that the Assessing Officer had not even identified the creditors whose balances were treated as unexplained. It was pointed out that neither the show-cause notice nor the assessment order contained creditor-wise details corresponding to the addition of Rs.3,75,11,202/-. The assessee submitted that in absence of such identification, no meaningful opportunity was given to explain the specific creditors. It was further contended that the balances represented trade creditors arising out of purchases made during the year and not fresh cash credits. The assessee also submitted that part payments had been made during the year and the remaining balances were paid in subsequent years, and therefore, the outstanding liabilities could not be treated as unexplained cash credits merely because they remained payable at year end.

15. Since the assessment order did not contain the names and details of the creditors corresponding to the addition, the learned CIT(A) called for a remand report. In the remand proceedings, the Assessing Officer was specifically directed to explain how the figure of Rs.3,75,11,202/- had been arrived at and to provide the assessee an opportunity to explain each creditor. In the remand report dated 23.06.2023, the Assessing Officer recorded that party-wise details of sundry creditors corresponding to the addition were not given in the show-cause notice issued during assessment proceedings. He further recorded that during remand proceedings an effort was made to identify the creditors, but the figure could not be reconciled in the absence of names of creditors from the assessment record. With the assistance of the assessee, a reconciliation exercise was undertaken and the Assessing Officer identified certain creditors aggregating to Rs.3,75,08,626/-, as against the assessment addition of Rs.3,75,11,202/-.

16. The remand report further shows that the Assessing Officer worked out the total closing balance of sundry creditors for goods at Rs.9,88,42,207/-, added sundry creditors for expenses of Rs.11,53,905/-, reduced creditors below the prescribed threshold and reduced creditors in respect of whom additions had already been made on account of non-genuine purchases. Thereafter, by adding one creditor namely Kareena Enterprises, the figure was broadly reconciled at Rs.3,75,11,202/-. The list so prepared included parties such as A B Infrabuild Pvt. Ltd., Bhavin Steel Pvt. Ltd., Deep Enterprises, Hemlata Corporation, J. Kumar Infraprojects Ltd., Kareena Enterprises, Maitree Construction, Mangalam Enterprises, M.E. Infraprojects Pvt. Ltd., Neev Infrastructure, Panin Enterprises, Poonam Enterprises, Rashmi Enterprises, Sharp Enterprises, Super Tiles and Marbles Pvt. Ltd. and VRL Trading Corporation. The Assessing Officer, however, reported that the addition made in assessment was Rs.3,75,11,202/- whereas the reconciled amount worked out during remand was Rs.3,75,08,626/-, and requested the learned CIT(A) to decide the issue on merits.

17. A copy of the remand report was forwarded to the assessee. In the rejoinder, the assessee specifically pointed out that the Assessing Officer had admitted that before making the addition, no show-cause notice giving creditor-wise particulars of Rs.3,75,11,202/- was issued to the assessee. It was submitted that this showed that the addition had been made on a hypothetical basis without identifying the creditors alleged to be non-genuine. The assessee further submitted that during the remand proceedings, notices under section 133(6) were issued to various creditors and many of them directly responded to the department. For the remaining creditors, the assessee furnished confirmations, ledger accounts, purchase bills, bank statements, PAN details and other supporting documents. The assessee thus contended that the creditors were fully verifiable and that no adverse material was found during remand proceedings.

18. The learned CIT(A) recorded the outcome of the remand proceedings in detail. He noted that several creditors had replied directly in response to notices issued under section 133(6), including some parties where the Assessing Officer had received replies through email or by post. In respect of certain parties where notices were returned unserved or no direct reply was received, the assessee had furnished supporting evidences such as confirmations, ledger accounts, purchase bills and bank statements. The learned CIT(A) also noted that the assessee had filed a detailed creditor-wise chart explaining the status of notices, replies and documents. On examining the remand report and the assessee’s rejoinder, the learned CIT(A) observed that the Assessing Officer had not made any adverse comment on the documents filed by the assessee or on the replies received from the creditors.

19. The learned CIT(A) thereafter held that the addition could not be sustained. He recorded that the specific creditors corresponding to the addition were not identified in the assessment order or show-cause notice, and even the remand report admitted that the details were not available in the assessment records. He further held that during remand proceedings, the Assessing Officer had made independent verification by issuing notices under section 133(6), and wherever the creditors did not directly reply, the assessee had filed documentary evidences which remained uncontroverted. The learned CIT(A) also noted that the creditors represented liabilities arising out of purchases and the Assessing Officer had not held that the corresponding purchases were bogus. He held that when purchases are accepted, the closing balance in the account of suppliers cannot be treated as unexplained cash credit under section 68 merely because it remained outstanding. On these facts and for these reasons, the learned CIT(A) deleted the addition of Rs.3,75,11,202/-.

20. The third issue relates to disallowance under section 14A read with Rule 8D. During assessment proceedings, the Assessing Officer noticed that the assessee had investments in mutual funds and shares and had earned exempt dividend income. Since the assessee had not made any suo motu disallowance, the Assessing Officer called upon the assessee to explain why disallowance under section 14A should not be made. The assessee submitted that no expenditure had been incurred for earning exempt income. The Assessing Officer, however, did not accept the contention and observed that the assessee had not maintained separate books of account for exempt income and that indirect expenses attributable to investment activity could not be ruled out. He accordingly computed disallowance of Rs.9,88,358/- under Rule 8D(2)(iii) by applying 0.5% of the average value of investments.

21. Before the learned CIT(A), the assessee submitted that the Assessing Officer had not brought any direct evidence of expenditure incurred for earning exempt income and had mechanically applied Rule 8D. It was further submitted that, in any case, the disallowance under section 14A could not exceed the exempt income earned during the year. The assessee relied upon several decisions including decisions holding that the amendment brought by the Finance Act, 2022 to section 14A is prospective and cannot be applied to assessment years prior to Assessment Year 2022-23. It was also submitted that without prejudice, the disallowance should be restricted to the amount of exempt income earned. The learned CIT(A), however, upheld the disallowance by observing that the assessee had earned exempt income, had not made any disallowance on its own, and had not maintained separate books in respect of exempt income. The learned CIT(A) also referred to the Explanation inserted below section 14A by the Finance Act, 2022 and held that the disallowance made under Rule 8D(2)(iii) was liable to be sustained.

22. Thus, the learned CIT(A) partly allowed the appeals. The addition on account of purchases was restricted to 15% of the disputed purchases; the addition under section 68 in respect of sundry creditors was deleted; and the disallowance under section 14A was upheld. The Revenue is in appeal against the relief granted on the purchase addition and deletion of the sundry creditor addition, whereas the assessee is in appeal against sustenance of the purchase addition to the extent of 15% and confirmation of disallowance under section 14A.

23. We have carefully considered the rival submissions, perused the orders of the authorities below and examined the entire material placed before us, including the assessment records, remand report, rejoinder filed by the assessee and the documentary evidences referred to in the appellate order. Since the principal controversy in the cross appeals relates to the addition made on account of purchases, we deem it appropriate to deal with this issue first. The Assessing Officer has treated the entire purchases aggregating to Rs.6,86,31,181/- as non-genuine, whereas the learned CIT(A) has restricted the addition to 15% thereof, resulting in sustenance of addition of Rs.1,02,94,680/-. The Revenue seeks restoration of the entire addition, while the assessee seeks deletion of even the amount sustained by the learned CIT(A).

24. At the outset, we find that the assessee had not merely furnished a general explanation before the Assessing Officer. The record demonstrates that party-wise documentary evidences were furnished in support of the purchases. These included confirmations from suppliers, copies of invoices, ledger accounts, PAN details, acknowledgements of income-tax returns, bank statements evidencing payments through banking channels and other supporting materials. The assessee had also specifically pointed out that notices issued under section 133(6) had been complied with by several parties and that, wherever direct responses were not forthcoming, the assessee itself furnished the relevant documentary evidences. These factual aspects have not been disputed by the Revenue. More importantly, there is no material brought on record by the Assessing Officer to establish that the payments made through banking channels had returned to the assessee in cash or that there existed any flow-back mechanism by which the assessee ultimately received back the amounts paid to the suppliers. The entire edifice of the addition is primarily founded upon the statement of Shri Naresh A. Hirani, the information received from the Investigation Wing and the inability of certain parties to respond to summons or be located at the addresses available on record.

25. At the same time, we are conscious of the fact that the circumstances relied upon by the Assessing Officer cannot be completely ignored. The statement of Shri Naresh A. Hirani, the material gathered during survey proceedings and the field enquiry reports in respect of M/s Maricia Infratech and M/s A.S. Enterprises undoubtedly justified a deeper examination of the transactions. However, the issue does not end there. The assessee is admittedly engaged in civil construction and execution of contract work for Government and Semi-Government authorities. The contract receipts disclosed by the assessee have been accepted by the department. The execution of work has not been doubted. The Assessing Officer has not brought any material on record to demonstrate that the projects undertaken by the assessee could have been executed without procurement and consumption of material. Nor has any evidence been brought on record to establish that the corresponding purchases were fictitious in the sense that no material was available for execution of the work. Once the turnover and execution of contract work stand accepted, the entire purchases cannot be elevated to the status of income merely on the basis of surrounding suspicion.

26. The consistent judicial approach in such cases has been that where sales or contract receipts are accepted and the corresponding work stands executed, what may survive for consideration is not the entire purchase amount but, at the highest, the possibility of some profit element embedded in such purchases. However, even such estimation cannot be undertaken in vacuum. The surrounding facts, the nature of business, the profitability already disclosed and the evidentiary record assume considerable significance while determining whether any further addition is warranted at all.

27. In the present case, the assessee has placed on record comparative profitability figures which have not been disputed. For Assessment Year 2015-16, the assessee disclosed turnover of Rs.45.47 crores and gross profit of Rs.8.12 crores, resulting in GP rate of 17.87%. For Assessment Year 2016-17, the turnover disclosed was Rs.31.99 crores and the gross profit disclosed was Rs.7.90 crores, resulting in GP rate of 24.70%. These figures reveal that the assessee had already offered substantial gross profit from its business activities. The Assessing Officer has accepted the turnover and has not rejected the books of account as a whole. Therefore, while examining the question of further estimation, the disclosed profitability cannot be ignored.

28. We find considerable force in the contention of the assessee that sustaining a further addition of 15% of the disputed purchases would result in a wholly disproportionate enhancement of profitability. The assessee has already disclosed a GP rate of 24.70% in Assessment Year 2016-17, which by itself is quite substantial for a civil contractor executing contract and sub-contract work. If a further addition of 15% on the disputed purchases is superimposed over and above the declared trading results, the resultant profitability would become commercially unrealistic and divorced from the realities of the business. Estimation of profit, howsoever permissible, must retain a rational nexus with the facts on record and cannot result in an artificial inflation of income.

29. Another significant circumstance which merits consideration is the decision of the Coordinate Bench in the case of the assessee’s own brother, Shri Mukesh Manuprasad Trivedi, vide order dated 16.03.2022 for Assessment Years 2008-09 to 2013-14. The Tribunal, while examining an identical controversy involving purchases from similar concerns, noted that the assessee therein had already disclosed gross profit rate of approximately 7.22% and held that further estimation at an excessive rate was not justified. Ultimately, the Tribunal restricted the addition to 4% over and above the disclosed results. Though the facts of every assessment year have to be independently appreciated and the said order cannot be mechanically applied, it nevertheless provides a useful factual indicator. If a GP rate of around 7.22% was considered sufficient to warrant only a limited estimation in that case, then the position before us stands on a much stronger footing where the assessee has already disclosed GP rates of 17.87% and 24.70% in the relevant years.

30. We also find that the learned CIT(A), while restricting the addition to 15%, has not demonstrated any objective basis for adoption of such rate. The estimation appears to have been adopted as a broad approximation. However, once the entire factual matrix is appreciated, namely, that the assessee has furnished confirmations, invoices, PAN details, income-tax particulars and bank statements; that contract receipts and execution of work stand accepted; that there is no evidence of cash being received back by the assessee; and that substantial gross profit has already been disclosed, the justification for making any further estimation becomes extremely fragile. The disclosed trading results themselves adequately take care of any possible element of inflation which the Revenue seeks to attribute to the purchases.

31. Having regard to the entirety of facts and circumstances, we are of the considered view that no separate addition on account of alleged non-genuine purchases is called for in Assessment Years 2015-16 and 2016-17. The gross profit already disclosed by the assessee is sufficiently robust and does not warrant any further enhancement by way of estimated addition. Accordingly, the addition sustained by the learned CIT(A) is directed to be deleted. Consequently, the grounds raised by the assessee on this issue are allowed, whereas the corresponding grounds raised by the Revenue stand dismissed.

32. We shall now advert to the Revenue’s challenge to the deletion of addition of Rs.3,75,11,202/- made under section 68 on account of sundry creditors. Having carefully examined the assessment order, remand report and findings of the learned CIT(A), we find ourselves in agreement with the conclusion arrived at by the learned CIT(A). The foremost feature which emerges from the record is that the addition was made without identifying the specific creditors whose balances were sought to be treated as unexplained. Neither the show-cause notice issued during assessment proceedings nor the assessment order itself contained the names of the creditors corresponding to the impugned addition of Rs.3,75,11,202/-. This is not a mere procedural irregularity but goes to the very root of the addition because unless the creditors are identified, no meaningful opportunity can be afforded to the assessee to explain the nature and source of such balances.

33. The remand proceedings further expose the inherent infirmity in the assessment. The Assessing Officer himself recorded that the creditor-wise details corresponding to the impugned addition were not available in the assessment records and had not been specified in the show-cause notice. It was only during the remand proceedings, after a reconciliation exercise undertaken with the assistance of the assessee, that an attempt was made to identify creditors whose balances broadly matched the figure added in assessment. This factual position itself demonstrates that the addition had been made without a proper creditor-wise examination at the assessment stage.

34. What is equally important is the outcome of the remand proceedings. Pursuant to the directions of the learned CIT(A), notices under section 133(6) were issued to various creditors. Several parties responded directly to the department. In respect of parties who did not respond, the assessee furnished confirmations, ledger accounts, purchase bills, PAN details, income-tax return acknowledgements and bank statements. The learned CIT(A) has tabulated the result of this verification exercise in considerable detail. Significantly, despite such verification, the remand report does not record any categorical finding that any particular creditor was fictitious, that any confirmation was false, that any purchase bill was fabricated, or that the supporting evidences furnished by the assessee were unreliable. The documentary evidences furnished during remand proceedings remained substantially uncontroverted.

35. There is yet another aspect which cannot be overlooked. The impugned balances represent outstanding trade liabilities arising from purchases. These are not credits representing introduction of unexplained money into the books of account. The Assessing Officer has nowhere held that the corresponding purchases were fictitious or that the liabilities had ceased to exist. Once purchases are accepted or not independently disproved, the unpaid balance appearing in the account of suppliers cannot automatically assume the character of an unexplained cash credit under section 68 merely because it remains outstanding at the end of the year. A trade creditor arising from business purchases stands on an altogether different footing from a cash credit, loan or unexplained deposit introduced in the books.

36. In the present case, the assessee furnished extensive documentary support in respect of the creditors. The remand proceedings did not reveal any adverse material. The very creditors corresponding to the addition were not identified at the assessment stage. In these circumstances, we find no infirmity in the conclusion reached by the learned CIT(A) that the addition of Rs.3,75,11,202/- under section 68 was unsustainable. We, therefore, uphold the order of the learned CIT(A) deleting the addition and dismiss the corresponding ground raised by the Revenue.

37. The last issue relates to disallowance under section 14A read with Rule 8D. The Assessing Officer has made disallowance of Rs.9,88,358/- under Rule 8D(2)(iii), which has been confirmed by the learned CIT(A). The assessee’s contention before us is that, in any event, the disallowance cannot exceed the exempt income earned during the year. We find substantial merit in this contention. The assessee has admittedly earned exempt dividend income of only Rs.58,229/-. The disallowance worked out by the Assessing Officer is many times higher than the exempt income itself.

38. The object of section 14A is to disallow expenditure incurred in relation to income which does not form part of the total income. The provision cannot be interpreted in a manner so as to create a disallowance exceeding the exempt income earned during the year. The learned CIT(A) has referred to the Explanation inserted by the Finance Act, 2022. However, for the assessment years before us, the settled legal position remains that the disallowance under section 14A cannot exceed the exempt income actually earned. Therefore, while upholding the applicability of section 14A in principle, we direct the Assessing Officer to restrict the disallowance to the amount of exempt income of Rs.58,229/-.

39. The grounds relating to levy of interest under sections 234A, 234B, 234C and 234D are consequential and shall be recomputed while giving effect to this order. The grounds relating to initiation of penalty proceedings are premature and do not call for separate adjudication.

40. In the result, the Revenue’s appeal stands dismissed. The appeals of the assessee are allowed in the manner indicated hereinabove.

Order pronounced on 9^th June, 2026.