Kaushal Pravinkumar Shah Vs ITO (ITAT Ahmedabad)
Purchases Accepted, Creditors Questioned: ₹11.20 Crore Addition Sent Back for Examination
Trade Creditors Cannot Be Examined in Isolation
The Ahmedabad Bench of the Income Tax Appellate Tribunal restored an assessment involving a substantial addition towards sundry creditors to the Assessing Officer for fresh examination. The Tribunal observed that where liabilities represent genuine purchases and the purchases themselves have been accepted, the corresponding trade creditors cannot be treated as unexplained cash credits under Section 68.
The order concerned an assessee whose returned income of ₹19.40 lakh had been assessed at approximately ₹11.63 crore, principally because the increase in sundry creditors was treated as unproved. The Tribunal found that the Assessing Officer had not doubted the purchases, sales or trading results and had not rejected the books.
However, the Tribunal did not finally delete the additions. It directed a fresh examination of all relevant material, with an opportunity for the assessee to produce supporting evidence.
Non-Compliance Leads to Substantial Additions
The assessee, proprietor of M/s Appar Chemicals, filed his return on 26 October 2023, declaring total income of ₹19,40,180.
During scrutiny, the assessee failed to comply with the assessment proceedings. The Assessing Officer completed the assessment at ₹11,63,20,636, making several additions and disallowances.
The principal addition was approximately ₹11.20 crore towards unproved sundry creditors. Other adjustments comprised ₹8,86,927 under Section 40(a)(ia), ₹3,36,025 under Section 37, and ₹11,44,319 representing one-fourth of total expenditure.
Thus, the dispute extended beyond creditor balances. It also involved expenditure disallowances whose factual basis required examination.
First Appeal Provides No Effective Examination
The assessee appealed before the CIT(A), NFAC. However, the first appellate authority noted non-prosecution and dismissed the appeal, stating that there was no reason to interfere with the assessment order.
Before the Tribunal, the assessee challenged the confirmation of the assessment and contended that the facts, evidence and circumstances had not been properly appreciated. He also complained of the absence of an effective opportunity of hearing.
The Tribunal appeal was delayed by 43 days. The reasons advanced included inadequate professional coordination, non-availability of supporting documents and difficulty compiling records.
Although the Tribunal described these explanations as unsatisfactory, it condoned the delay in the interest of justice and proceeded to examine the appeal.
Entire Increase in Creditors Treated as Bogus
The Tribunal recorded that the Assessing Officer had treated the difference between closing and opening sundry creditor balances as bogus for want of supporting evidence.
This method effectively brought the entire increase in creditors into the tax computation. Yet, the Assessing Officer had not questioned the purchases, sales or trading results, and the books of account had not been rejected.
The Tribunal identified the need to examine the connection between the liability and the underlying purchases. If the liability arose from genuine purchases that had been accepted, treating the corresponding creditors as unexplained credits under Section 68 of the Income Tax Act required reconsideration. TaxGuru has also reported decisions applying this principle where purchases and trading results were accepted. TaxGuru has also reported decisions applying this principle where purchases and trading results were accepted.
The finding was expressed conditionally: the liabilities must represent genuine purchases. Accordingly, the order does not establish that every creditor appearing in accepted books is automatically immune from scrutiny.
Expense Disallowances Also Require Verification
The Tribunal also examined the disallowance of ₹3,36,025 under Section 37, which included issues such as interest on GST.
It noted that the Assessing Officer had made the disallowance on the basis of the Form 3CD report without verifying all relevant facts. The order also recorded that neither the Assessing Officer nor the CIT(A) had adequately deliberated on the other issues.
The Tribunal did not pronounce a final conclusion on the deductibility of GST interest or the validity of the remaining expenditure adjustments. Its finding was that the relevant facts and supporting material needed proper examination before a conclusion could be reached.
Assessment Restored to the Assessing Officer
Considering these deficiencies, the Tribunal set aside the matter to the Assessing Officer for fresh examination of all relevant materials.
The assessee must be given an opportunity to present his case with supporting evidence. At the same time, the Tribunal expressly directed him to promptly comply with all hearing notices, having failed to participate before both the Assessing Officer and the CIT(A).
If further default occurs, the Assessing Officer may pass an order on the material available, in accordance with law. The appeal was therefore allowed for statistical purposes.
Author’s Comments
The decision highlights the need for a coherent assessment of purchases and the liabilities arising from them. Where trading transactions are accepted, an addition based merely on the increase in creditor balances requires careful factual justification.
For the assessee, the remand is an opportunity to establish the identity of creditors, the underlying transactions and the correctness of outstanding balances. It is not a final finding that the entire ₹11.20 crore liability is genuine.
Similarly, the observations concerning Form 3CD should not be understood as an allowance of the disputed expenses. The Tribunal required verification. An audit disclosure may identify an issue for examination; the assessment must still determine its treatment on the relevant facts.
FULL TEXT OF THE ORDER OF ITAT AHMEDABAD
The assessee has filed the appeal against the order dated 27-02-2026 passed by Commissioner of Income Tax (Appeals), National Faceless Appeal Centre NFAC, Delhi (in short, referred to as the CIT(A)) u/s. 250 of the Income Tax Act, 1961 (herein referred to as “the Act”) relating to Assessment Year 2023-24.
2. The assessee raised the following grounds of appeal:-
“1. The learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, has erred in law and on facts in confirming the assessment order passed under section 143(3) read with section 144B of the Income-tax Act, 1961.
2. The learned CIT(A) has erred in dismissing the appeal without properly appreciating the facts, evidences and circumstances of the case and without granting effective opportunity of being heard.
3. The appellant craves leave to add, alter, amend or withdraw any of the above grounds of appeal before or at the time of hearing.”
3. There was delay of 43 days in filing of appeal before the Tribunal. Lack of proper professional co-ordination, non-availability of supporting documents and difficulties in compiling necessary records are mentioned as some of the reasons for delay. The reasons are not satisfactory. However, in the interest of justice, delay is condoned.
4. Brief facts of the case are that assessee, proprietor M/s Appar Chemicals, filed return of income on 26-10-2023 admitting total income of Rs. 19,40,180/-. AO completed scrutiny assessment assessing the total income at Rs. 11,63,20,636/- (due to non-compliance of assessee) by making the following additions:
| Sl. No. | Description | Amount In Rs. |
|---|---|---|
| 1 | Liability on account of sundry creditors not proved | 11,20,13,185/- |
| 2 | Disallowance u/s. 40a(ia) | 8,86,927/- |
| 3 | Disallowance u/s. 37 | 3,36,025/- |
| 4 | Disallowance ¼ of total expenditure | 11,44,319/- |
5. Aggrieved by this addition, assessee filed appeal. CIT(A) noted the non-prosecution of the appeal by the appellant and dismissed the appeal holding that there is no reason to interfere with the assessment order.
6. Aggrieved by the order of CIT(A), assessee filed this appeal before ITAT.
7. We have heard both the parties and perused the material available on record. It is undisputed fact that assessing officer treated the entire difference amount of sundry creditors i.e. Rs. 11,20,13,158/- (closing balance – opening balance of sundry creditors) during the year as bogus for want of necessary evidence. AO had not doubted the purchases, sales or trading results and the books had not been rejected. If the liability represents genuine purchases, and purchases themselves have been accepted, the corresponding trade creditors cannot be treated as unexplained tax credits u/s. 68 of the Act. Similarly in respect of other issues like disallowance on account of interest on GST etc. AO disallowed a sum of Rs. 3,36,025/- on the basis of Form 3CD report without verifying all relevant facts. Also, both AO and the CIT(A) did not deliberate on other issues. Therefore, in the interest of justice, we set aside the case to the file of AO for fresh examination of all relevant materials, after giving due opportunity of hearing to the assessee to present his case with supporting evidence. It may be mentioned that since the assessee did not cause appearance before the ld. AO and the ld. CIT(A), the assessee is directed to promptly comply with all notices of hearing and in case of any further default on the part of the assessee, Ld. AO would be at liberty to pass orders on the basis of materials on record in accordance with law.
8. In the result, the appeal is allowed for statistical purposes.
Order pronounced in the open court on 28-09-2026
