ITAT Deletes Section 68 Addition on Trade Creditors, Rejects Profit Estimation

FULL TEXT OF THE ORDER OF ITAT LUCKNOW

This is an appeal filed by the assessee against the order of the ld. CIT(A), NFAC dated 2.07.2025 wherein the ld. CIT(A) has partly allowed the appeals of the assessee that were filed against the order of the ld. Assessing Officer under section 143(3) for the assessment year 2016-17 on 25.12.2018. The grounds of appeal are as under:-

“1. That the Learned Lower Court erred in law and facts of the case by not allowing the appeal.

2. That the Learned Lower Court erred in law by not providing the reasonable 2 opportunity of being heard through video conferencing even after requesting for the same.

3. That the Learned Lower Court erred in facts and legal aspects of the case in making addition of Rs. 13,35,356/-being difference of income as per 26AS and books.

4. That the Learned Lower Court erred in making addition of Rs 13,35,356/- on account of alleged Difference with 26AS without bringing on record any evidence that the difference was income of the appellant.

5. That Learned Lower Court erred in giving notice for disallowing expenses of Rs. 1,03,61,521/- of sundry creditors whose confirmations were not received by him 5 but made addition of Rs 2,06,55,949/- u/s 68.

6. That when confirmations of sundry creditors were e-filed by appellant no addition should have been made of Rs 2,06,55,949/-

7. That the Learned Lower Court erred in legal aspects of case in confirming the addition amounting to Rs. 2,06,55,949/- u/s 68 relating to Sundry Creditors even though no sum of money was received by them.

8. That when all books of accounts were e-filed as required in the notice rejecting the books of accounts is bad in law.

9. That when the income returned was more than the profit estimated by the Ld. A.O., 9 the Learned Lower Court confirming the addition made amounting to Rs 8,75,820/-is bad in law.

10. That the order passed is against the merit, circumstances and legal aspects of the case.

11. That the appellant seeks permission to modify and/or add any other ground or grounds of appeal as the circumstances of the case might require or justify.”

2. The facts of the case are that the assessee ran a business in the name and style of M/s Aakriti Engineers. The ld. Assessing Officer observed that the case was selected for scrutiny on account of the fact that the receipt under section 194C and 194J were more than the receipt shown in the ITR. He asked the assessee to explain and in response the assessee submitted that he had accidentally failed to include the rent of machinery to the extent of Rs. 2,24,000/- and salary from Sankalp design to the tune of Rs. 12,00,000/-. The ld. Assessing Officer also recorded the submission of the assessee that a sum of Rs. 4,42,50,000/- had been received as advanced from M/s Ideal Unique Realtors Private Limited, on which TDS under section 194C had been deducted and which had been shown as current liability in the balance-sheet. The ld. Assessing Officer considered the submissions of the assessee. He noted that the assessee had only disclosed salary and rent from Sankalp design to the extent of Rs. 14,24,000/- but not disclosed this sum of Rs. 13,35,356/- on account of difference of receipts between 26AS and the ITR. He therefore, added back a sum of Rs. 27,59,356/- on these two accounts. Furthermore, the ld. Assessing Officer observed that one of the reasons that the case was selected for scrutiny was “large number of sundry creditors”. On perusal of the balance-sheet, he noticed that the assessee had shown sundry creditors of Rs. 52,18,86,649/- under the head, “current liability”. Upon query, the assessee submitted the details of sundry creditors and in order to verify the veracity of the same, the ld. Assessing Officer issued notices under section 133(6) to thirteen sundry creditors on a test check basis. He found that the transactions were correct in the case of three parties, in the case of one party i.e. M/s Concept Fancy Hardware, the party confirmed the transaction but did not produce copy of its ITR and in the case of six parties, only confirmations in the form of ledgers could be produced by the assessee. The ld. Assessing Officer voiced the belief that in order to prove the sundry creditors, the assessee needed to prove the identity, creditworthiness and genuineness of transaction in all cases. He held that the identity is not established only by filing ITR and PAN, similarly furnishing of bank statements does not prove the creditworthiness of the creditors and the completion of paper work by filing of confirmation does not establish the identity and creditworthiness of parties or the genuineness of transactions. He noted that since the assessee had failed to explain anything as far as creditworthiness of the parties and genuineness of transactions are concerned, it was hit by the provisions of section 68 and ld. Assessing Officer thought it fit to make an addition of Rs. 2,06,55,949/- in respect of the balances standing in the name of nine of these sundry creditors. Finally, the ld. Assessing Officer asked the assessee to produce the books of accounts alongwith bills and vouchers. In response, while the ld. Assessing Officer uploaded the ledgers, it submitted that most of the vouchers were at the Mumbai office and therefore, it asked for ten days’ time to produce the same. However, the ld. Assessing Officer pointed out that the case was to be barred by limitation before then and the same could not be allowed. Accordingly, the assessee was given time up till 24.12.2018 but since the details were not uploaded, the ld. Assessing Officer rejected the books of account under section 145(3) of the Act and applied a net profit rate of 8% on the turnover of Rs. 8,22,00,228/- and subsequently made an addition of Rs. 8,75,820/- on account of the difference NP applied and NP declared by the assessee in its returns.

3. Aggrieved with the assessment order, the assessment went before the ld. CIT(A). Before the ld. CIT(A), it was submitted that the ld. Assessing Officer had erred in making the disallowance of Rs. 13,35,356/- on account of alleged difference with the 26AS without bringing on record any evidence that the difference was the income of the assessee. It was submitted that the assessee had filed re-conciliation of 26AS with the books of account and explained that the difference in the Directorate of Construction and office of EENISM Project were because these parties had deducted TDS on gross values, including service tax, while in the P&L account, the net amount had been credited. It was submitted that the ld. Assessing Officer had presumed the difference to be income without supporting the addition with tangible evidence. It was submitted that the Hon’ble Mumbai ITAT in the case of TUV India Pvt. Ltd. (2019) 75 ITR 364 (Mum)(Trib) held that addition could not be made due to discrepancy as shown in Form 26AS when there was a difference in accounting policy followed by the assessee and clients, in that the clients had deducted TDS on amounts inclusive of service tax whereas the income reflected by the assessee was exclusive of service tax. On the issue of addition of Rs. 2,06,55,949/- under sundry creditors, the assessee submitted that the ld. Assessing Officer had given a notice for disallowing expenses to the extent of Rs. 1,03,61,521/- but subsequently made the addition of Rs. 2,06,55,949/-. It was submitted that the assessee had submitted a total list of sundry creditors alongwith address and PAN which contained a summary of opening balance, purchases made, payments and closing balances. The copies of accounts of all creditors were also filed. All sundry creditors were on account of purchases made from them. No sum of money was received from them. All payments were made through banking channels. The ld. Assessing Officer had issued notice to disallow expenses claimed under sundry creditors while addition was made under section 68 of the sum being purchases made from these parties. The reliance placed on the judgment of the Hon’ble Apex Court in the case of Kale Khan Mohammad Hanif vs. CIT, (1963) 50 ITR 1 (SC) was misplaced because no sum of money had been received by the assessee. It was submitted that for the suppliers who were not responded to notices under section 133(6), the ld. Assessing Officer was empowered to issue summons under section 131 but could not have made the addition in the absence of any money being received from the parties by the assessee. He placed reliance on various case laws wherein the Courts had held that only because the parties had not responded to notices of the Department, addition could not be made in the hands of the assessee. With regard to the rejection of the books of accounts, the assessee submitted that the assessee had been given inadequate time to submit the details called for by the ld. Assessing Officer. The assessee had already declared a net profit of 9.87% as is business results and the ld. Assessing Officer had reduced it by deducting the amount of income tax of Rs. 24,16,884/- from the same. It was submitted that since the ld. Assessing Officer had rejected the books and estimated the profits, several additions could thereafter not be made on account of disallowance of expenses. For this reason, also, the addition of Rs. 2,06,55,949/- was bad in law. He also placed reliance on the decision of the Hon’ble Allahabad High Court in the case of Commissioner Of Income-Tax vs Banwari Lal Banshidhar, (1998) 229 ITR 229 (All) which held that when gross profit rate is applied, that would take care of everything and both additions could not be made. With regard to the estimation of profit by the ld. Assessing Officer also, it was submitted that the income returned was more than the profit estimated by the ld. Assessing Officer and therefore, the estimation of profits after rejection of books of accounts was bad in law. Accordingly, even the addition of Rs. 8,75,820/- was uncalled for.

4. The ld. CIT(A) considered these submissions of the assessee and noted that the presumption arising from Form 26AS could only be rebutted by it credible by third party evidence or certified records, none of which had been filed before the ld. Assessing Officer. Accordingly, he held that the explanation of the assessee could not be accepted at face value and he confirmed the addition of Rs. 13,35,356/- on this account. With regard to the addition of Rs. 2,06,55,949/- on account of sundry creditors, he held that the assessee had failed to consider the foundational requirement of section 68 which required him not only to prove the identity of the creditors but also their creditworthiness and the genuineness of the transaction. In the present case, he noted that a majority of the parties had not responded to the notices issued by the ld. Assessing Officer under section 133(6) and the assessee had not produced them. Therefore, the burden of proof was not discharged by the assessee. Accordingly, he confirmed the addition of Rs. 2,06,55,949/-. With regard to the addition of Rs. 8,75,820/- made on account of difference in net profit computed and net profit declared in the returns, the ld. CIT(A) noted that the books were not supported by complete verifiable evidence and therefore, the rejection of the books was justified. He held that the rate of 8% adopted by the ld. Assessing Officer was consistent with the accepted norms in civil contracts business and was neither arbitrary nor excessive. The resultant addition was therefore, the logical consequence of non-verifiable records. Accordingly, on all three issues, the appeal of the assessee was dismissed. However, the assessee was given relief on other grounds of appeal and the appeal came to be partly allowed.

5. The assessee is aggrieved with this order of the ld. CIT(A) and has accordingly come before us. Sh. Ashwani Kumar, C.A. (hereinafter referred to as the ld. AR) submitted before us a reconciliation of Form 26AS with the books of account. It was submitted that there was difference between the amounts given in the Form 26AS and the amount given in the income tax returns, because in the case of two parties namely office of Executive Engineer, NISM Project Division-1 and Directorate of Construction Services and Estate Management, the amounts on which the tax was deducted was inclusive of the figures of service tax, whereas the amounts disclosed by the assessee in its income tax returns were exclusive of the figures of service tax, as the service tax did not constitute the income of the assessee. However, in the books of accounts of the assessee, service tax was reflected separately. On allegation that no documentary proof had been furnished, it was submitted that the assessee uploaded a ledger with bifurcation of the amounts and therefore, these were indicated separately. However, if the figures were taken together then they matched. It was submitted that this information had been submitted before both the ld. Assessing Officer and the ld. CIT(A). As proof thereof, the ld. AR drew our attention to the acknowledgment filed before the ld. CIT(A) on 22.05.2023 which contained a 26AS reconciliation. Accordingly, it was prayed that since the service tax stood computed separately in its books of account, there was in fact, no difference in the amounts which could brought to addition. Reliance was placed on the decision of ITAT Mumbai in the case of TUV India Pvt. Ltd. vs. DCIT, (2019) 75 ITR 364 (Mum) for this proposition. On the issue of addition of Rs. 2,06,55,949/- under section 68, it was submitted that all the details had duly been submitted before both the ld. Assessing Officer and the ld. CIT(A). The ld. Assessing Officer on a test check basis had issued notices under section 133(6) to thirteen parties and nine of those parties had confirmed the transaction with the assessee. In four cases, confirmations had not been received. However, the ld. AR argued that that this was no ground to make any addition in the hands of the assessee. These were not cash credits. All the credits were on account of purchases made by the assessee. Therefore, there was no need for the assessee to prove the creditworthiness of the parties. The purchases that were made were on account of construction material which was utilized by the assessee in its work. Our attention was invited to page 3 of the order where the ld. Assessing Officer had recorded the fact that the assessee had submitted the details of sundry creditors reflecting the opening balance, purchases and payments made and also the closing balance. It was submitted that before any of the sundry creditors could be disallowed, the ld. Assessing Officer had to record a finding of bogus purchases being made by the assessee. However, the ld. Assessing Officer had not recorded any such finding of bogus purchases in his assessment order. Furthermore, it was submitted that section 68 could not be applied to this particular case because the assessee had not received any money but on the contrary had purchased goods for which payment was still due. In any case, it was submitted that the show cause notice issued by the ld. Assessing Officer was on account of expenses claimed to the extent of Rs. 1,03,61,521/- and thereafter addition had been made under section 68 for Rs. 2,06,55,949/- which was clearly bad in law. Accordingly, it was prayed that the addition was fit to be deleted.

6. On the issue of production of books of accounts, it was submitted that the assessee had uploaded its books of account on 20.12.2018 alongwith these 73 ledgers have been e-filed. However, since the appellants main work was being carried out in Mumbai hence some vouchers were to be obtained from there, for which 10 days’ time was requested. The ld. Assessing Officer did not grant the necessary time and wrongly held that the details of expenses had not been furnished when the complete ledgers had been e-filed. Accordingly, it was submitted that there was no basis to reject the accounts and apply net profit rate of 8%. Furthermore, it was submitted that after making the disallowance, the ld. Assessing Officer had estimated the net profit at Rs. 65,76,018/- but the net profit disclosed by the assessee in his return was already Rs. 81,09,777/- which was more than the estimated addition. The ld. Assessing Officer had deliberately reduced the returned net profit of the assessee by deducting the amount of income tax deposited, but this was not a correct way of determining net profit. Accordingly, it was prayed that since there was no basis to reject the books of accounts or to estimate the income, the addition was fit to be deleted.

7. On the other hand, Smt. Pratibha Singh, Addl CIT DR (hereinafter referred to as the ld. DR) submitted that no third-party confirmations had been filed. Nine parties had not provided confirmation in response to the notices issued by the assessee. It was the assessee who had filed the confirmations on behalf of these parties. The ld. Addl CIT DR submitted if the third party was not confirming directly, the ld. Assessing Officer had no option but to confirm the addition. She therefore, submitted that the addition made by the ld. Assessing Officer was fit to be confirmed. With regard to the addition of Rs. 13,35,356/- on account of difference of receipts between 26AS and ITR, she submitted that the assessee had not provided any documentary evidence. Finally, with regard to the claim that the books of accounts have been wrongly rejected, the ld. DR submitted that the entries in the balancesheet were not verifiable and hence the ld. Assessing Officer had no option but to reject the books of accounts.

8. We have duly considered the facts and circumstances of the case and the arguments advanced by both the parties. It has been explained to us by the ld. AR that the difference in the amounts credited in the Form 26AS and offered to tax in the income tax returns amounting to Rs. 13,35,356/- is solely on account of the fact that two of the deductors deducted the tax on the total receipts payable to the assessee inclusive of service tax whereas the assessee had only offered the amount received by it, exclusive of service tax as its income in its returns. It has further been submitted that the service tax returns had been filed on 30.11.2018 and that service tax is separately accounted for in its books of accounts. The ld. AR has submitted that this is reflected in the ledgers of these two parties where the bifurcation of the amounts is provided. After considering the submissions of the assessee, we deem it appropriate in the in the interest of justice, to restore this matter back to the file of the ld. Assessing Officer so that the assessee may demonstrate to ld. Assessing Officer regarding the receipt of service tax amount and its subsequent deposit with the Service Tax Authorities, so as to reconcile the difference the amount paid to it by Directorate of Construction of Service and Estate Management and the office of the Executive Engineer, NISM Project Divisoin-1 with the amounts declared by it in its income tax return, as having been received from these parties. Accordingly, ground nos. 3 and 4 are held to be allowed for statistical purposes.

9. Ground nos. 4, 5, 6 & 7 relate to the disallowance of Rs. 2,06,55,949/- under section 68 of the Act. We notice from the submissions made that the assessee was initially issued a show cause notice for disallowing expenses of Rs. 1,03,61,521/-, but subsequently, the disallowance was made of Rs. 2,06,55,949/-. Thus, prima facie it appears that the disallowance was made by the ld. Assessing Officer without giving the assessee adequate opportunity to the assessee to explain its case which would in turn render the additions made to be bad in law. We further notice that having issued a show cause notice for disallowance of expenditure, the ld. Assessing Officer has subsequently made an addition under section 68 of the Act, which in the instant case is not possible because the assessee’s books had not been credited and the assessee had not received any such amount from any party. In fact, it is observed that the sundry creditors are sundry creditors for purchases and the ld. Assessing Officer has not brought any finding on record to dispute the purchases made by the assessee. It is also observed that even while the sundry creditors may not have responded to notices issued by the ld. Assessing Officer, the assessee subsequently filed confirmations that were obtained from them and the ld. Assessing Officer acknowledges the fact that confirmations have been received from ten of the thirteen parties during the course of assessment. We note that the ld. Assessing Officer is misdirected in his approach of considering that assessee was required to prove the creditworthiness of these creditors. This is because the credits as reflected in the final accounts of the assessee are not cash credits, but rather liabilities owed by the assessee against purported purchase of goods on credit. We note that during the course of assessment, the ld. Assessing Officer had not brought any material on record to show that the purchases claimed to be made by the assessee were in fact not made. He had not undertaken any enquiry whatsoever to disprove the fact of these purchases or to show that the liabilities for purchases on credit had actually been discharged and yet were being claimed. Since it was the assessee who was purchasing the goods from these parties, the creditworthiness of the creditors is not material to establishing the genuineness of the sundry creditors. Unless the ld. Assessing Officer could point out inconsistencies in the purchases themselves or the retention of the creditors on the balance-sheet as liability even after payments had been made to them, in our view, no addition could be made by the assessee on this account. We note that in the case Joint Commissioner of Income Tax vs. Mathura Dass Ashok Kumar, 101 ITD 810 (All) the Hon’ble ITAT in a similar case had held :-

“AO has treated the liability to be of cash credit in nature and that is why he felt anxious to have the identities of the creditors established. In this respect, first of all, we hold that credits ‘in the sundry creditors (udhar Khareed Khata)’ are referable to purchases of sarees on cash basis. As the purchases have been held to be genuine and accepted as such the credits that remained outstanding in such account cannot be treated to have remained unexplained. The balance appearing in this account, which included the disputed addition also, is the sum total of purchases that remained unpaid at the end of the year. As the genuineness of such purchases has not been disputed, rather, the same has been accepted, the credits stand fully explained and no adverse inference is called for, either on fact and law.”

10. Thus, once the appellant purchases, sales and trading results have been accepted by the AO, as they have been in this case, because no dispute has been raised with regard to the same, the purchases shown in his books stands automatically accepted. Thereafter, if certain purchases are stated to be made on credit, the credit cannot be doubted without first doubting the purchases. It is entirely possible that the assessee may have made purchases from some other parties than claimed. It is also possible that the assessee may have made purchases from the same parties who have supplied the bills but did not respond to the letters issued by the AO. But, unless the AO could show by way of inquiry that the purchases have never taken place and were bogus, the credit amount represented on account of such purchases could not be added back to the income of the assessee, unless it could be shown that the liabilities had in fact been discharged and were still being claimed. As the AO has not undertaken any exercise to disprove them, in view of the facts of the case as discussed above and in view of the aforesaid judgements cited above, it is held that the addition of Rs. 2,06,55,949/- under section 68 is neither sustainable on the facts nor in law.

11. Accordingly, we hold that in view of the fact that the purchases made by the assessee have not been doubted, the addition of Rs. 2,06,55,949/- under section 68 of the Act. Accordingly, ground nos. 4, 5,6 and 7 are held to be allowed.

12. On the issue of rejection of the books of account and addition of Rs. 8,75,820/- on account of the difference in computed net profit and disclosed net profit, we note that the assessee had uploaded all the ledgers and books on 20.12.2018 and also 73 major vouchers but was not in a position to upload all the vouchers for which it requested sometimes since they were located at Mumbai. The ld. Assessing Officer did not grant the assessee that opportunity on account of the fact that his proceedings were getting barred by limitation. However, the ld. Assessing Officer has not pointed out in the course of his order as to which items of expenditure were doubtful and unverifiable on account of the failure of the assessee to produce these vouchers. Simply because the assessee could not make compliance within the short time frame that the ld. Assessing Officer had provided to it, cannot be a ground to reject the books of accounts. Furthermore, the ld. Assessing Officer, while computing the income of the assessee and making the addition has reduced the amount of income tax paid from the returned net profit of the assessee thereby creating an artificial figure of net profit. Since the actual net profit is much more and disclosed @ 9.87% of gross receipts which is quite reasonable for a Civil Contractor, we are not convinced at a fit case has been made out for rejection of the books of accounts or estimation of net profit. Accordingly, we hold that when all the books of account had been e-filed alongwith the major vouchers and sufficient time was not allowed for furnishing the remaining vouchers, the rejection of books of accounts and estimating the addition is not sustainable. Ground nos. 8 and 9 is accordingly allowed. Ground no. 1, 2 and 10 are held to be allowed for statistical purposes while ground no. 11 is held to be not pressed.

13. In the result, the appeal of the assessee is held to be partly allowed for statistical purposes.

Order pronounced on 31.08.2026 in the Open Court.