Absence of Legal Heir Certificate Alone Cannot Justify Section 68 Addition; ITAT Delhi Reduces GP Estimation

Rajesh Kapoor Vs ACIT (ITAT Delhi)

Absence of Legal Heir Certificate Alone Cannot Justify Section 68 Addition; ITAT Delhi Reduces GP Estimation

Material Facts

The assessee appealed against the order dated 18.11.2024 passed by the Commissioner of Income Tax (Appeals) under Section 250 for Assessment Year 2016-17, arising from an assessment order dated 25.12.2018 passed under Section 144 of the Income-tax Act, 1961. The appeal before the Tribunal was delayed by 38 days, which the assessee attributed to the death of his father, who had managed his business affairs. The Tribunal condoned the delay after finding sufficient cause.

The assessee had filed a return declaring total income of ₹57,59,950. The Assessing Officer (AO) made additions of:

• ₹15,50,25,441under Section 68 towards unsecured loans.
• ₹3,20,45,584under Section 68 towards increase in capital.
• ₹2,18,92,400as trading addition by rejecting the books under Section 145(3) and applying a gross profit (GP) rate of 82% instead of the declared 2.33%. The assessed income was determined at ₹21,47,23,375.

The CIT(A) partly allowed the appeal by deleting part of the addition relating to unsecured loans but sustained:

• ₹6,69,18,805under Section 68 towards unsecured loans;
• ₹3,20,45,584towards unexplained capital; and
• the trading addition of ₹2,18,92,400.

Legal Issues

• Whether the addition of ₹6,69,18,805under Section 68 in respect of unsecured loans was sustainable.
• Whether the addition of ₹3,20,45,584under Section 68 towards capital introduction was justified.
• Whether rejection of books under Section 145(3)and application of a GP rate of 82% were justified.

Relevant Statutory Provisions

• Sections 68, 133(6), 143(2), 142(1), 144, 145(3)and 250 of the Income-tax Act, 1961.

Parties’ Submissions

Assessee’s Submissions

Regarding unsecured loans, the assessee submitted that due to the death of his father and subsequent financial difficulties, confirmations from certain creditors could not be obtained. However, names, addresses, PAN details, confirmations for most creditors, copies of income-tax returns in some cases, and evidence that part of the loans had been repaid through banking channels in subsequent years were furnished. It was also contended that once these details were furnished before the CIT(A), the AO ought to have issued notices under Section 133(6) instead of requiring the assessee to produce the creditors.

Regarding capital introduction, the assessee submitted that the funds represented transfers from the bank account of his deceased father, together with amounts received from redemption of mutual funds and LIC maturity proceeds. The AO had accepted that the funds were transferred from the father’s bank account but rejected the claim for want of a legal heir certificate.

Regarding the trading addition, the assessee contended that the books were audited, no defects had been pointed out, turnover had increased substantially, and the fall in GP rate resulted from higher turnover achieved by lowering profit margins.

Revenue’s Submissions

The Revenue submitted that the assessee failed to establish the identity, genuineness and creditworthiness of the loan creditors, as bank statements were not furnished in most cases. It further contended that the capital addition remained unsubstantiated due to absence of supporting documents, including the father’s income-tax return, and justified application of the earlier year’s GP rate owing to the unexplained fall in GP.

Tribunal’s Findings and Reasoning

Unsecured Loans

The Tribunal observed that the assessee had furnished names, addresses, PAN details, confirmations and, in many cases, copies of creditors’ income-tax returns. It also noted that some loan balances represented opening balances brought forward from earlier years, which could not be added under Section 68, as the provision applies only to sums credited during the relevant year.

The Tribunal further observed that loans had been received through banking channels and part of them had been repaid in subsequent years. It directed the AO to consider the details furnished, exclude brought-forward balances from addition, make no addition where repayments through banking channels had not been doubted, and conduct necessary enquiries by issuing notices under Section 133(6) to verify the creditworthiness of the lenders. The issue was remitted to the AO for fresh examination.

Capital Addition

The Tribunal noted that the AO had not disputed that funds had been transferred from the father’s bank account after his death. It directed the AO to verify the father’s financial statements regarding availability of capital funds transferred to the assessee and held that if the assessee’s contention was found correct, no addition should be made. This issue was also remitted to the AO.

Trading Addition

The Tribunal observed that although the GP rate had fallen from 2.82% to 2.33%, the assessee’s turnover had increased substantially, resulting in higher gross profit and net profit in absolute terms. It also noted that the assessee had not fully justified the fall in GP.

After referring to the decision of the Delhi High Court in PCIT vs IBILT Technologies Ltd., the Tribunal held that application of a GP rate of 2.5% would be fair and reasonable and directed the AO to recompute the addition accordingly.

Final Ruling

The Tribunal:

• Condoned the delay of 38 days in filing the appeal.
• Remanded the addition of ₹6,69,18,805under Section 68 relating to unsecured loans to the AO for fresh examination with specific directions.
• Remanded the addition of ₹3,20,45,584relating to capital introduction for verification.
• Directed the AO to recompute the trading addition by applying a GP rate of 2.5%instead of 82%.
• Partly allowed the appeal.

Cases Discussed

• PCIT vs IBILT Technologies Ltd. (Delhi High Court), [2018] 98 taxmann.com 255 (Delhi)
• CIT v. Poonam Rani (Delhi High Court), [2010] 326 ITR 223/192 Taxman 167 (Delhi)
• Action Electricals v. Dy. CIT (Delhi High Court), [2002] 258 ITR 188 / 132 Taxman 640
• CIT v. Calcutta Discount Co. Ltd. (Supreme Court of India), [1973] 91 ITR 8 (SC)
• Dhakeshwari Cotton Mills Ltd. v. CIT (Supreme Court of India), [1954] 26 ITR 775 (SC)
• Raghubar Mandal Harihar Mandal vs State of Bihar (Supreme Court of India), AIR 1957 SC 810

FULL TEXT OF THE ORDER OF ITAT DELHI

The present appeal is filed by assessee against the order dated 18.11.2024 passed by Ld. Commissioner of Income Tax (A)-24, New Delhi [“Ld. CIT(A)”] in Appeal No. CIT(A), Delhi-16/10237/2018-19 u/s 250 of the Income Tax Act, 1961 [“the Act”] arising out of assessment order dated 25.12.2018 passed u/s 144 of the Act pertaining to Assessment Year 2016-17.

2. The appeal filed by the assessee is barred by 38 days for which a request was made wherein it is stated that the business of the assessee was looking after by his father who unfortunately, passed away and the assessee was not aware of the pending appellate proceedings and when Counsel for the assessee has contacted the assessee and informed about the order passed by Ld. CIT(A), he immediately filed this appeal. The appeal thus, barred by 38 days. It is, requested that under these circumstances, the delay being bonafide may please be condoned.

3. Per contra, Ld. CIT DR strongly opposed the request of the assessee for condonation of delay in filing the appeal by the assessee.

4. Having considered the arguments of both the parties. We find that there is a reasonable and sufficient cause with the assessee in filing the appeal delayed by 38 days which was occurred due to sudden demise of his father who was looking after all the affairs of the assessee. It must be remembered that in every case of delay, there can be some lapses on the part of the litigant concerned however, that alone is not enough to turn down the plea of assessee and to shut the doors against it. When the explanation does not smack of mala fide or it is not put-forth as a part of dilatory strategy, the Courts must give utmost consideration to such litigant and its right of hearing of appeal on merit ought not to be rejected. Considering the overall facts and circumstances of the case and in the larger interest of justice, delay in filling the appeal is hereby condoned and appeal of the assessee is admitted for adjudication on merits.

5. Briefly facts of the case are that the assessee has filed his return of income on 15.10.2016, declaring total income of INR 57,59,950/-. The case was selected under CASS for complete scrutiny and notice u/s 143(2) was issued on 07.2017 followed by notices issued u/s 142(1) alongwith questionnaires from time to time. The assessee is a trader in food grains, pulses and also doing commission agency business. The assessee declared G.P @ 2.33% on the turnover of INR 4,46,78,36,699/-. The AO observed that during the year under appeal, the assessee has taken loans from various persons and thus, asked the assessee to file details so as to prove their identity and creditworthiness and genuineness of the transactions. In absence of the details, AO has made the addition of INR 15,50,25,441/- u/s 68 of the Act by holding the unsecured loans as unexplained credits. Besides this, the assessee was asked to file the details of purchases made of INR 39,69,66,329/- from 31 parties as tabulated at pages 5 to 7 of the order however, the assessee failed to file even the confirmations or complete addresses of these parties. The AO thus, observed that the assessee has failed to justify the purchases made and accordingly, he invoked the provision of section 145(3) by rejecting the books of accounts and after applying the G.P. rate of 2.82% as declared in immediately preceding year, made the trading addition of INR 2,18,92,400/-. The AO further observed that during the year, there was an increase in the capital of the assessee of more than INR 3.66 crores and accordingly, held the sum of INR 3,20,45,584/- as unexplained and made the addition for the same u/s 68 of the Act. Accordingly, total income of the assessee stood assessed at INR 21,47,23,375/-.

6. Against the said order, the assessee filed an appeal before the Ld. CIT(A) who vide impugned order dated 18.11.2024, has partly allowed the appeal of the assessee after obtaining the Remand Report from the AO. CIT(A) out of the total addition of INR 15,50,25,441/- made u/s 68 of the Act on account of unsecured loans, has confirmed the addition of INR 6,69,18,805/-. The remaining additions of INR 3,20,45,584/- made on account of increase in capital u/s 68 of the Act and trading addition of INR 2,18,92,400/- made by applying G.P rate of 2.82% are sustained by ld. CIT(A).

7. Aggrieved by the order of Ld. CIT(A), the assessee is in appeal before the Tribunal by taking various Grounds of appeal as mentioned in the appeal memo.

8. Grounds of appeal 1 & 2 raised by the assessee are general in nature hence, not adjudicated.

9. Ground of appeal No. 3 raised by the assessee is with respect to the confirmation of addition of INR 6,69,18,805/- made u/s 68 of the Act towards unsecured loans.

10. Before us, Ld. AR for the assessee submits that the AO has made the addition of INR 15,50,25,441/- u/s 69 of the Act towards the unsecured loan taken during the year out ld. CIT(A) has deleted the addition of INR 8,81,06,636/- and upheld the remaining sum of INR 6,69,18,805/-. AR submits that the business of the assessee was looked after by his deceased father and due to his untimely demise in the month of March, 2016, entire business activity was badly hampered and assessee was not able to serve the creditors. Further, the business premises as well as residential premises were taken by the bankers. Under these circumstances, the assessee the loan creditors had denied to cooperate with the assessee and had not provided the confirmations etc. Ld. AR further submits that assessee has filed name, complete addresses and PAN of the loan creditors and confirmations in respect of most of the loan creditors were also filed. He submits that out of the total loans outstanding, a sum of INR 3,56,60,112/- were repaid in subsequent years. He further submits that in some cases assessee has filed copy of their ITR also. Ld. AR submits that once the complete details like addresses and PAN of the loan creditors were provided before the ld. CIT(A) and the remand report was called from the AO, it was the duty of the AO to issue summons u/s 133(6) tot eh loan creditors however, the AO insisted upon the assessee to produce them. Ld. AR thus, requested that under these circumstances, the additions made be deleted.

11. On the other hand, Ld. CIT DR for the Revenue vehemently supported the orders of lower authorities and submits that despite of repeated opportunities, the assessee has not been able to prove the genuineness of transactions, identity and creditworthiness of the loan creditors. The assessee though filed certain confirmations alongwith PAN, ITR and bank statements which were sent to AO and Remand Report was called for. In the Remand Report, AO has again stated that the assessee has failed to establish the genuineness of the transaction and creditworthiness of the lenders as in most of the cases, bank statements were not filed. Ld. CIT DR thus, submits that the addition may be confirmed.

12. Heard the parties and on careful consideration of the overall discussions made herein above and considering the facts and circumstances of the case, it is observed that ld. CIT(A) has sustained the addition towards the unsecured loans of INR6,69,18,805/- taken during the year under appeal. The assessee has further failed to file the confirmations etc. to prove the genuineness of transactions and has not established their creditworthiness. The assessee thereafter filed complete names, addresses and PAN before the Ld. CIT(A). It is further observed that in most of the cases, assessee has filed confirmations alongwith the copy of ITR of the respective creditors as additional evidences which are placed at pages 26 to 74 of the PB. It is observed that in some of the cases, there are opening balances brought forward from preceding years which appears to be added as part of the loan amount received during the year. AS per section 68 of the Act, any sum credited in the books of account during the year could only be added and thus such opening balances could not be added u/s 68 of the Act. Considering the entirety of the facts and in the larger interest of justice, the issue of unsecured loans is remitted to the file of AO with the directions to provide an opportunity to consider the details filed by the assessee and the additions to the extent of the sum brought forwards from preceding years, no addition be Further the assessee has received the loans through banking channels thus the genuineness is proved and since part of loans were repaid in subsequent years where the payments have not been doubted thus to such extent no addition should be made. For the remaining, the should make necessary enquiries by issue summons u/s 133(6) to verify the creditworthiness of the lenders and decide the issue in accordance with law. Accordingly, Ground of appeal No.3 raised by the assessee is allowed for statistical purposes.

13. Ground of appeal 4 is with respect to the addition of INR 3,20,45,584/-made by holding that unexplained credits in the capital account.

14. Before us, AR submits that due to sudden death of the father of assessee, the capital balance of INR 3,24,51,522/- available in his proprietary firm M/s. Deepak Kumar & Brothers situated at 4067, Naya Bazar, Delhi-110006 was transferred to the bank account of assessee on various dates after his death and credited in the capital account of the assessee. For this, the assessee has placed on record the death certificate of his father and submits that the funds were received in the bank accounts of the assessee. The assessee also filed copy of capital account and other details in respect of the contention so raised. The AO in the Remand Report though has accepted that the total a sum of INR 3,66,53,544/- was transferred from the bank account of his father after his death however, since no legal Heir certificate was produced, the claim of the assessee was not accepted as genuine receipts of funds. Ld.AR submits that once the assessing officer has accepted this fact that the funds were transferred from his father’s account, no addition should made be made. He prayed accordingly.

15. On the other hand, Ld. CITDR for the Revenue submits that assessee has failed to file the ITR and audited balance of the father of the assessee therefore, the capital balance as claimed by the assessee remained unsubstantiated. Thus, Ld. CIT DR requested for the confirmation of the order of the lower authorities.

16. Heard the contentions of both the parties and perused the material available on record. It was the claim of the assessee that due to sudden demise of his father in 08^th March 2016 (as per Death Certificate), the capital balances appearing in his name in the books of accounts of his proprietary firm M/s Deepak Kumar & Brothers was transferred to the assessee. Besides this, certain amounts received from the redemption of Mutual Funds and LIC payments were also credited. Accordingly, total sum of INR 3,66,53,544/- were credited in the bank account of the assessee on various dates out of which except sum of INR 7.00 Lakhs were received from the redemption of HDFC Mutual Fund and LIC maturity, the remaining funds were received from the bank account of the father of the assessee. The AO in the Remand Report has though not doubted the receipt of funds from the bank account of the father of the assessee however, in absence of legal heir certificate has alleged the said money as unexplained. Further, Ld. CIT(A) asked the assessee to file the copy of the return of income of his father which has not been filed. Under these circumstances, ld. CIT(A) has confirmed the addition.

17. Considering the overall facts and circumcise of the case, this issue is also remitted to the file of AO for making necessary verification from the financial statements of the father of the assessee about the availability of capital funds which were transferred to the bank account of assessee after the death of his father and if the contention of the assessee is found correct that the said sum was received from the bank account of his father, no addition is required to be made. With these directions, Ground of appeal No.4 raised by the assessee is allowed for statistical purposes.

18. Ground of appeal No. 5 raised by the assessee is with respect to the addition of INR 2,18,92,400/- made by applying profit rate of 2.82 % as against 2.33%declared by the assessee resulting into an application of additional P rate of 0.49%.

19. Before us, Ld.AR for the assessee submits that the estimation of income of the assessee is mainly for the reason that the G.P. rate has fallen from 2.82% to 2.33% however, the AO has not pointed out any defect in the books of accounts which were duly audited. Ld.AR submits that turnover of the assessee has increased multifold from INR 190.19 crores in AY 2014-15 to INR 446.78 Crore in the year under appeal.

20. AR submits that it is an established principal of marketing that higher turnover could only be achieved by lowering the profit margin which fact was not appreciated by the lower authorities. He therefore, requested for the deletion of the addition made.

21. On the other hand, Ld. Sr. DR submits that the assessee has not given any justifiable reason for fall in the G.P. rate and thus the AO has rightly invoked the provision of section 145(3) and applied the G. P. Rate of 2.82 % as was declared in immediately preceding AY. She therefore, requested for the confirmation of the addition made.

22. Heard the parties and perused the material available on records. On careful consideration of the overall facts of the case and the submissions made herein above it is observed that there was a fall in G. P. rate from 2.82% to 2.33% into year under appeal and corresponding N.P. rate was also reduced from 0.24% to 0.13%the . It is further observed that turnover of the assessee has increased multi-fold during the corresponding period and therefore, even though there was a fall in P. rate, the assessee has been able to earn the better profits in terms of money as compared to the preceding years. It is an accepted principal that high turnover could be achieved by reducing the profit margin which ultimately resulted into the better profits. This fact is duly verifiable from the financial results declared by the assessee where due to increase in turnover from INR 213.46 crores to INR 446.78 crores in the year before us, the assessee has been able to achieve the G.P. of INR 10.41 crores as against INR 6.01 crores in preceding years and the N.P. rate at INR 56.09 Lakhs as against INR 51.09 Lakhs in preceding years. Yet the fact reamend that the assessee has not been able to fully justify the reasons for fall in G.P. rate.

23. The Hon’ble Delhi High Court in the case of PCIT vs IBILT Technologies Ltd. reported in [2018] 98 taxmann.com 255 (Delhi) has made following observations:-

“If there is fall in the gross profit ratio, reasons and grounds given by the respondent/assessee have to be examined objectively, fairly and in a nonpartisan manner. Past results could be a good reason to conduct detailed verification, albeit would not be the only ground and reason to make addition by rejecting the books of account. Good and cogent reason why the financial results should be rejected has to be given. Books of account cannot be rejected as the respondent- assessee has suffered losses, where as in the immediate earlier year profit was made. Fall in gross profit ratio could be due to various reasons, and cannot be the sole and only ground to reject the book results in entirety and frame best judgment assessment [see CIT v. Poonam Rani [2010] 326 ITR 223/192 Taxman 167 (Delhi), Action Electricals v. Dy. CIT [2003] 132 Taxman640/ [2002] 258 ITR 188 (Delhi)]. The reasoning given in the assessment order to compute income only hypothetical basis by applying gross profit ratio of 4% is completely fallacious, wrong and is contrary to well-settled law, as expounded vide judgments reported as CIT v. Calcutta Discount Co. Ltd. [1973] 91 ITR 8 (SC), Dhakeshwari Cotton Mills Ltd. v. CIT [1954] 26 ITR 775 (SC) and Raghubar Mandal Harihar Mandal vs State of Bihar AIR 1957 SC 810.”

24. Considering the overall facts and circumstances of the case and by respectfully following the judgement of Hon’ble Delhi High Court in the case of PCIT Vs. AIBILT Technologies Ltd. (supra), in our considered opinion, G.P rate of 2.5% would be fair and reasonable in the given facts and circumstances of the case as against 2.33% G.P. rate declared by the assessee to meet the end of justice. Accordingly, the AO is directed to recompute the addition by applying the GP rate @ 2.5%. With these directions, Ground of appeal No.5 raised by the assessee is partly allowed.

25. In the result, appeal filed by the Assessee is partly allowed.

Order pronounced in the open Court on 03.07.2026.