No Section 41(1) or 68 Addition on Suspicion: ITAT Mumbai

ITO-41(3)(3) Vs Nawalkishor Basudev Sharma (ITAT Mumbai)

Mere non-furnishing of confirmations and supporting documents during assessment does not establish cessation of a trading liability under Section 41(1), and unsecured loans supported by documentary evidence cannot be added under Section 68 merely on suspicion.

Summary: The ITAT Mumbai dismissed the Revenue’s appeal against the order of the National Faceless Appeal Centre for A.Y. 2022-23, upholding deletion of additions of Rs.6,00,70,268/- towards sundry creditors under section 41(1) and Rs.44,28,000/- towards unsecured loans under section 68 of the Income-tax Act, 1961. The assessee, engaged in export of granites, marbles, construction material and textile products, had originally declared total income of Rs.22,73,190/-, while the Assessing Officer determined total income at Rs.6,76,69,848/- after making additions towards sundry creditors, brokerage expenses and unsecured loans. The Tribunal noted that the assessee subsequently furnished creditor-wise details, confirmations, purchase particulars and bank statements showing discharge of substantial creditor balances in the succeeding financial year. Relying upon CIT v. Sugauli Sugar Works (P.) Ltd., it held that section 41(1) requires remission or cessation of liability and that subsequent payment of creditor balances negated the inference of cessation during the relevant year. Regarding unsecured loans, confirmations, PAN particulars, returns of income and bank statements supported the identity, creditworthiness and genuineness of the creditors, and CIT v. Orissa Corporation (P.) Ltd. supported the assessee’s case. The Tribunal also rejected the Revenue’s Rule 46A objection, holding that the CIT(A) possesses co-terminus powers, that the additional evidence had a direct bearing on the additions, and that the Revenue had not demonstrated any specific prejudice, defect or falsity in the evidence. The Tribunal further held that CASS selection parameters merely provide a basis for scrutiny and cannot independently justify an addition without satisfaction of the relevant statutory conditions. Accordingly, Ground Nos.1-5 were dismissed and the Revenue’s appeal was dismissed.

Core Issue: The core issues before the Tribunal were whether outstanding sundry creditors could be treated as remission or cessation of trading liabilities under Section 41(1) merely because confirmations, bills and vouchers were not furnished during assessment, whether unsecured loans could be added under Section 68 despite documentary evidence establishing identity, creditworthiness and genuineness, and whether the CIT(A) could consider additional evidence in the facts of the case.

Facts: The assessee, an individual engaged in the business of export of granite, marble, construction material and textile products under the name of M/s L.N. Exports, filed his return declaring income of ₹22,73,190. The case was selected for scrutiny through CASS on account of large turnover without audit under Section 44AB and high liabilities compared to income and receipts. During assessment, the Assessing Officer treated sundry creditors aggregating to ₹6,00,70,268 as cessation of liability under Section 41(1), as confirmations, bills and vouchers were not produced. Unsecured loans aggregating to ₹44,28,000 were also added under Section 68 for want of supporting documents. Before the CIT(A), the assessee furnished creditor-wise details, confirmations, purchase details and bank statements showing that substantial amounts due to trade creditors were subsequently paid. In respect of unsecured loans, confirmations, PAN details, income-tax returns and bank statements of the creditors were produced.

AO/CIT(A) Finding: The Assessing Officer made additions of ₹6,00,70,268 towards alleged cessation of sundry creditors under Section 41(1), ₹44,28,000 towards unsecured loans under Section 68 and ₹8,98,390 towards brokerage expenses. The CIT(A), after examining the additional documentary evidence, deleted the addition relating to sundry creditors and the addition relating to unsecured loans, while sustaining the brokerage disallowance. The Revenue challenged the deletion of the two major additions and also objected to the admission of additional evidence under Rule 46A.

ITAT Finding: The Tribunal held that Section 41(1) applies only when the assessee obtains a benefit by way of remission or cessation of a trading liability. Mere existence of outstanding creditors or failure to furnish confirmations during assessment does not establish cessation. Since the liabilities substantially related to purchases made during the relevant year and substantial amounts were subsequently discharged through banking channels, there was no basis to infer that the liabilities had ceased. Regarding unsecured loans, the Tribunal held that the assessee had established the identity and creditworthiness of the creditors and the genuineness of the transactions through confirmations, PAN particulars, income-tax records and bank statements. As the Revenue failed to bring any contrary material on record, the addition could not be sustained merely on doubt. On the issue of additional evidence, the Tribunal accepted that the assessee had reasonable cause for not producing the documents during assessment due to the medical condition of his wife. It further held that, in the absence of any demonstrated prejudice or infirmity in the evidence, the appellate findings could not be invalidated merely because of the Revenue’s objection regarding Rule 46A. The Tribunal also clarified that CASS selection parameters merely define the scope of scrutiny and do not themselves constitute evidence for making statutory additions.

Cases Relied Upon: The Tribunal relied upon CIT v. Sugauli Sugar Works Pvt. Ltd., 1999 (2) TMI 5 – Supreme Court, for the principle that Section 41(1) requires actual remission or cessation of liability. Reliance was also placed upon CIT v. Orissa Corporation Pvt. Ltd., 1986 (3) TMI 3 – Supreme Court, regarding the evidentiary requirements for sustaining an addition in respect of creditors. On the powers of the appellate authority and consideration of additional evidence, reference was made to CIT v. Kanpur Coal Syndicate, 1964 (4) TMI 18 – Supreme Court, and Smt. Prabhavati S. Shah v. CIT, 1998 (2) TMI 107 – Bombay High Court.

Outcome: The Revenue’s appeal was dismissed. The deletion of the addition of ₹6,00,70,268 under Section 41(1) and ₹44,28,000 under Section 68 was upheld. The Tribunal confirmed that genuine subsisting trade liabilities cannot be treated as income merely because supporting documents were not initially furnished and that properly documented unsecured loans cannot be added merely on suspicion.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

This appeal by the Revenue is directed against the order dated 08/12/2025 passed by the National Faceless Appeal Centre [“Ld. CIT(A)”] for A.Y. 2022-23. The Revenue has raised the following grounds of appeal:-

“1. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in deleting addition of Rs.6,00,70,268/- on account of the sundry creditors in view of the fact that the Assessee failed to submit ledger account, bills and vouc hers during assessment proceedings.

2. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in deleting addition of Rs.44,28,000/- on account of unsecured loan in absence of Assessee’s failure to submit the evidenc e of identity, creditworthiness and genuineness of the transaction at the time of assessment proceedings.

3. Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in not considering the fact that the addition was made on t he basis of selection of case for scrutiny through CASS for the reasons that large turnover but books of accounts not audited u/s 44AB and High liabilities as compared to low income/receipts. 4. Whether on the fact and in the circumstances of the case, the Ld. CIT(A) erred in law in admitting and relying upon additional evidences filed by the assessee for the first time at the appellate stage without complying with the mandatory provisions of Rule 46A of the Income- tax Rules, 1962?

5. Whether the Ld. CIT(A) was justified in granting relief to the assessee on the basis of additional documentary evidences without affording an opportunity to the Assessing Officer to examine, verify, or rebut such evidences?”

2. Brief facts of the case are as under:

The assessee, an individual, is engaged in the business of export of granites, marbles, construction material and textile products under the name and style of M/s. L.N. Exports. The assessee filed the return of income for the year under consideration on 31/12/2022 declaring total income of Rs.22,73,190/-. The case was selected for scrutiny through CASS on account of large turnover without audit u/s 44AB and high liabilities as compared to income/receipts.

2.1. The Ld.AO completed the assessment u/s 143(3) r.w.s. 144B of the Act, on 08/03/2024, determining the total income at Rs.6,76,69,848/-. The following additions were made:

2.2. In respect of the sundry creditors, the Ld.AO required the assessee to furnish confirmations, bills and vouchers in respect of twelve creditors aggregating to Rs.6,00,70,268/-. As the requisite details were not furnished in response to the show- cause notice, the Ld. AO held the impugned liabilities to have ceased and made the addition u/s 41(1) of the Act.

2.3. In respect of unsecured loans aggregating to Rs.44,28,000/-, the Ld.AO required the assessee to furnish confirmations, returns of income, computation of income, capital accounts, balance sheets and bank statements of the loan creditors. Since the assessee did not furnish the requisite supporting documents, the Ld.AO added the loan amount u/s 68 of the Act. Aggrieved by the assessment order, the assessee preferred appeal before the Ld.CIT(A).

3. The assessee submitted creditor- wise details, confirmations, purchase details and bank statements reflecting payments made to the creditors in the succeeding financial year. It was submitted that the outstanding liabilities were primarily in respect of purchases made during the year and that substantial balances had been discharged during F.Y. 2022-23.

3.1. In re spect of the unsecured loans, the assessee furnished confirmations, PAN particulars, returns of income and bank identity and creditworthiness of the creditors, as well as the genuineness of the loan transactions, stood duly established.

3.2. The Ld.CIT(A), after considering the material placed on record, deleted the addition of Rs.6,00,70,268/- made u/s 41(1) and the addition of Rs.44,28,000/- made u/s 68 of the Act. The addition of Rs.8,98,390/- towards brokerage expenses was sustained.

Aggrieved by the relief granted by the Ld. CIT(A), the Revenue is in appeal before us.

We have perused the submissions advanced by both sides in light of the record placed before us.

4. The Ld.AO treated the outstanding trade creditors as cessation of liability merely because confirmations, bills and vouchers were not furnished in response to the show- cause notice. Before the Ld.CIT(A), the assessee furnished creditor- wise details, confirmations and bank stat ements demonstrating that substantial part of the outstanding balances had been discharged in the immediately succeeding financial year. The Ld. CIT(A) also recorded that the liabilities substantially related to purchases made during the relevant year.

4.1. Hon’ble Supreme Court in CIT v. Sugauli Sugar Works (P.) Ltd. reported in (1999) 236 ITR 518 held that section 41(1) is attra cted only where the assessee obtained any benefit by way of remission or cessation of a trading liability. Mere continuance of an cessation thereof. In the present case, the subsequent discharge of the creditor balances, supported by the payment details placed on record, negates the inference that the assessee obtained any benefit in respect of such liabilities during the relevant previous year. We, therefore, find no infirmity in the decision of the Ld. CIT(A) deleting the addition of Rs.6,00,70,268/-.

4.2. In respect of the addition of Rs.44,28,000/- made u/s 68 of the Act, the Ld.CIT(A) recorded that the assessee furnished confirmations, PAN particulars, returns of income and bank statements of the respective loan creditors. Thus, the assessee furnished documentary material in support of the identity of the creditors, their creditworthiness and the genuineness of the loan transactions.

4.3. Hon’ble Supreme Court in CIT v. Orissa Corporation (P.) Ltd. reported in (1986) 159 ITR 78 h eld that where the assessee furnishes the relevant particulars of the creditors and the Revenue does not bring material on record to disprove the explanation, the addition cannot be sustained merely on the basis of doubt. In the present case, the Revenue h as not placed any material before us to controvert the factual finding of the Ld.CIT(A) based on the confirmations, income- tax particulars and bank statements of the loan creditors. We, therefore, do not find any reason to interfere with the deletion of the addition of Rs.44,28,000/-.

4.4. The Revenue has also challenged the admission of additional evidence by the Ld. CIT(A) without following the procedure prescribed under Rule 46A of the Income- tax Rules, 1962 (“the Rules”). In this regard, the Ld. DR filed written submissions dated 21/08/2026, stating that the assessee had sought admission of additional evidence before the Ld. CIT(A) on the ground that the same could not be furnished before the Ld. AO due to medical reasons pertaining to the assessee’s wife. It was contended that the Ld. CIT(A) was bound to follow the procedure prescribed under Rule 46A before relying upon such evidence.

4.5. We have considered the aforesaid objection. It is not disputed that the assessee had explained before the Ld. CIT(A) that the relevant documents could not be furnished during the assessment proceedings on account of the medical condition of his wife. In our considered opinion, the explanation furnished by the assessee constituted a reasonable and sufficient cause for the inability to produce the documents before the Ld. AO. The additional evidence consisted of confirmations, ledger accounts, purchase particulars, subsequent payment details, returns of income and bank statements, all of which had a direct bearing on th e additions made by the Ld. AO.

4.6. The powers of the Ld. CIT(A) are co- terminus with those of the Ld. AO. In terms of section 250(4) of the Act, the Ld. CIT(A) is empowered to make such further enquiry as deemed fit or to direct the Ld. AO to make further enquiry and report the result thereof. The Hon’ble Supreme Court in CIT v. Kanpur Coal Syndicate, reported in [1964] 53 ITR 225 (SC), held that the first appellate authority has plenary powers in disposing of an appeal and can do what the Ld. AO could ha ve done as well as direct the Ld. AO to do what he had failed to do.

4.7. The Hon’ble jurisdictional High Court in Smt. Prabhavati S. Shah v. CIT, reported in [1998] 231 ITR 1 (Bom.), held that the restrictions placed under Rule 46A are on the right of th e assessee to produce additional evidence and do not curtail the powers of the first appellate authority u/s. 250(4) of the Act. Where the evidence is necessary for proper disposal of the appeal, the Ld. CIT(A) is duty-bound to consider the same in order t o arrive at the correct conclusion.

4.8. In the present case, the Ld. AO made the additions primarily because the relevant documents could not be furnished during the assessment proceedings. The Ld. CIT(A), upon considering the explanation for such non-pro duction and examining the documentary evidence, recorded categorical findings regarding the existence of the sundry creditors, subsequent discharge of the outstanding liabilities and the identity, creditworthiness and genuineness of the unsecured loan cred itors. The evidence was therefore not extraneous to the issues under consideration but went to the very root of the additions.

4.9. The written submissions filed by the Ld. DR raise a procedural objection regarding Rule 46A. However, the Revenue has neither disputed the authenticity of the documents considered by the Ld.CIT(A) nor brought any material before us to controvert the factual findings recorded in the impugned order. The Revenue also did not demonstrate that the outstanding liabilities ceased durin g the year under consideration or that the confirmations, income- tax particulars and bank statements of the loan creditors were false or unreliable.

5. The Ld.CIT(A), being the first appellate authority, exercises co -terminus powers with those of the Assessing Officer in relation to the subject matter of the appeal and is required to determine the correct tax liability on the basis of the material available before him. In the present case, the additional evidence furnished by the assessee was admitted after considering the circumstances in which such evidence could not be produced before the Assessing Officer. More importantly, the Ld.CIT(A) did not mechanically rely upon the additional evidence; he examined and verified the documents furnished by the a ssessee and thereafter recorded his findings on the merits of the additions.

5.1. We also find that, before us, the Revenue has not pointed out any specific defect, infirmity, or falsity in the documents so considered by the Ld.CIT(A), nor has it demonstra ted how the examination of such material resulted in any prejudice to the Revenue. The sole objection raised by the Revenue is that the procedure contemplated under Rule 46A was not expressly followed/recorded in the impugned order. In these circumstances, the objection regarding Rule 46A, by itself, cannot be elevated to a ground for rejecting the substantive findings of the Ld.CIT(A), particularly when the material was before the appellate authority, was examined by him, and the additions have thereafter been adjudicated on merits.

5.2. The requirement of Rule 46A is intended to ensure procedural fairness and an effective opportunity to the Ld.AO. It is not intended to defeat an otherwise valid adjudication on merits where the appellate authority, in exercise of his co- terminus powers, has demonstrate any prejudice caused by its consideration. The mere absence of a separate discussion under the heading of Rule 46A, without more, would therefore not r ender the order of the Ld.CIT(A) unsustainable, particularly when the Revenue has not identified any specific prejudice or material infirmity arising from consideration of the additional evidence. The objection of the Revenue on this count is, accordingly, not sufficient to dislodge the findings recorded by the Ld.CIT(A) on merits.

5.3. We further note that the addition of Rs.6,00,70,268/- was made u/s. 41(1) merely because confirmations, bills and vouchers were not furnished before the Ld.AO. Even in the absence of the additional evidence, mere non- furnishing of confirmations does not es tablish remission or cessation of a trading liability. The Revenue was required to establish that the assessee obtained benefit by way of remission or cessation during the relevant previous year. No such material was brought on record by the Ld.AO. The subsequent payment details considered by the Ld. CIT(A) only reinforced the subsisting nature of the liabilities.

5.4. Similarly, in respect of the unsecured loans aggregating to Rs.44,28,000/-, the Ld.CIT(A) recorded a factual finding that the assessee had furnished confirmations from the respective creditors, their PAN particulars, returns of income and bank statements. The aforesaid documents furnished the relevant material for examining the three ingredients contemplated under section 68 of the Act, namely, identity of the creditors, their creditworthiness and genuineness of the transactions. Upon examination of the said material, the Ld.CIT(A) accepted the Before us, the Revenue has neither pointed out any specific infirmity in the aforesaid documents nor brought on record any material to controvert the factual findings recorded by the Ld.CIT(A). No adverse material has also been placed before us to establish that the transactions were non-ge nuine or that the creditors lacked the financial capacity to advance the loans.

5.5. We have already observed that the Ld.CIT(A), being the first appellate authority, has co- terminus powers with the Assessing Officer in relation to the subject matter of th e appeal. The additional evidence was considered by him and the documents furnished by the assessee were examined while adjudicating the additions on merits. In such circumstances, the object of Rule 46A, namely, to ensure fairness and an effective opportu nity to the Assessing Officer in respect of additional evidence, cannot be divorced from the question of prejudice. In the peculiar facts of the present case, the Revenue has not demonstrated before us any specific prejudice caused by consideration of the additional evidence, nor has it controverted the evidentiary material on merits.

5.6. We are conscious that compliance with Rule 46A cannot ordinarily be treated as a mere formality. However, the present case cannot be decided merely on the basis of the ab sence of a separately recorded finding under each clause of Rule 46A. The material in question before the appellate authority, was examined by him, and formed the basis of findings rendered on merits. More importantly, even before us, the Revenue has not i dentified any specific defect in the documents relied by the Ld.CIT(A), nor has it remand solely to enable the Revenue to raise a procedural objection, in the absence of demonstrated prejudi ce and without any challenge to the evidentiary material on merits, would serve no meaningful purpose and would only prolong the litigation.

5.7. The CASS parameters merely constitute a basis for selection of the assessee’s case for scrutiny. Such paramete rs may define the scope or reason for undertaking scrutiny, but they do not, by themselves, establish the existence of taxable income or justify an addition. Any addition must independently satisfy the conditions prescribed under the relevant statutory pro vision and must be supported by material brought on record during the assessment proceedings. In the present case, the Revenue has not demonstrated how the mere selection of the case under the CASS parameters could sustain the additions in the absence of t he requisite statutory conditions being established.

5.8. In view of the foregoing discussion, we find no merit in the Revenue’s objection concerning the admission and consideration of the additional evidence. The findings recorded by the Ld.CIT(A) are bas ed upon the material available on record and have not been shown to be factually or legally incorrect. The Ld.DR’s challen ge on this count thus stands, rejected.

Accordingly, Ground Nos.3-5 raised by the Revenue stands dismissed.

6. In view of the foregoing discussion, we find no infirmity in the view of the Ld.CIT(A) in deleting the addition of Rs.6,00,70,268/- made under section 41(1) of the Act and the addition of Rs.44,28,000/- made under section 68 of the Act, as the Revenue has failed to demonstrate any error therei n warranting interference by this Tribunal.

Accordingly, Ground Nos.1-2 raised by the Revenue stands dismissed.

In the result, appeal filed by the Revenue is dismissed.

Order pronounced in the open court on 31-08-2026.