Section 263 Revision on Creditors and Section 194Q Quashed: ITAT Surat

Patson Foods India Pvt. Ltd. Vs PCIT (ITAT Surat)

Revision on Wrong Facts: Section 263 Order Falls on Both Counts

Two Alleged Errors, Neither Established

The Surat Bench of the Income Tax Appellate Tribunal quashed a revision order under section 263 after finding that both grounds relied upon by the Principal Commissioner were unsustainable.

The first concerned an alleged failure to add ₹18.66 lakh of sundry creditors under section 68. The second concerned an alleged failure to disallow ₹39.16 lakh under section 40(a)(ia) for short deduction of tax under section 194Q.

The assessment records showed that the AO had conducted enquiries and the assessee had furnished supporting documents. Further, the alleged TDS shortfall arose because the PCIT considered purchases for the entire financial year, overlooking that section 194Q became effective only from 1 July 2021.

The Tribunal consequently restored the original assessment order.

The Assessment and Subsequent Revision

The assessee’s return for AY 2022–23 was scrutinised, and the assessment was completed under section 143(3) read with section 144B on 20 March 2024.

Subsequently, the PCIT examined the assessment records and considered the order erroneous and prejudicial to the interests of the Revenue. Following a show-cause notice dated 12 December 2025, he passed the revision order on 20 January 2026.

According to the PCIT, the AO had failed to take appropriate action concerning six creditors and purchases from four suppliers. The assessee challenged both conclusions by producing the enquiries, replies, ledger accounts and other documents already forming part of the assessment record.

Creditors’ Silence Was Not the Whole Story

The AO had issued notices under section 133(6) to six creditors whose balances aggregated to ₹18,66,414. Those notices remained unanswered. The PCIT also alleged that the assessee had failed to furnish documentary evidence and concluded that the credits remained unexplained.

However, the assessment record disclosed a specific enquiry under section 142(1), seeking invoices, payment particulars, bank statements and evidence of subsequent payments.

In response, the assessee furnished creditor ledgers, countersigned confirmations and bank statements. It explained that it purchased agricultural produce, including mangoes, from small farmers who did not maintain formal bill books. Payments were made through banking channels.

The Tribunal found that the assessee had sufficiently discharged its primary burden. It observed that the assessee did not control whether the creditors responded to departmental notices. Where primary supporting documents had been furnished, their failure to respond could not, by itself, justify an addition under section 68.

The Ledger Entries Also Contradicted the Revision

The Tribunal further examined the actual transactions.

In the case of four creditors, there were no purchases or corresponding credit entries during the relevant year. In another creditor’s case, purchases had been made, but payment was completed through banking channels during the year itself, leaving no year-end balance.

These facts provided additional support for rejecting the PCIT’s conclusion. The Tribunal held that the assessment could not be characterised as erroneous and prejudicial to the Revenue on this issue.

The decision therefore rests on a combination of factors: actual enquiry by the AO, documentary evidence furnished by the assessee and the nature of the ledger entries. It was not merely a case of accepting creditors because their names appeared in the books.

Section 194Q: The Commencement Date Changed the Calculation

The PCIT’s second objection concerned purchases from four suppliers.

After reducing the ₹50 lakh threshold for each supplier, he computed purchases attracting TDS at ₹3,18,11,258. Since the assessee had deducted tax on ₹1,87,58,087, he treated the difference of ₹1,30,53,171 as a shortfall and proposed a 30% disallowance of ₹39,15,951 under section 40(a)(ia).

The assessee demonstrated that section 194Q commenced on 1 July 2021 and that tax had been deducted as required on purchases after that date.

The AO had already sought purchase registers, supplier-wise particulars and TDS returns. The assessee had furnished those documents and the relevant supplier ledgers. Before the Tribunal, it also submitted a concise reconciliation chart.

The Tribunal verified the documents and found that the PCIT had incorrectly considered purchases for the whole of FY 2021–22 when inferring short deduction. The assessee’s explanation remained undisputed by the Revenue.

Accordingly, the alleged shortfall was not established, and the AO could not be faulted for omitting the proposed disallowance.

Author’s Comments

The decision illustrates why the assessment record matters more than a broad allegation of inadequate enquiry. Specific notices, complete replies, confirmations and bank evidence enabled the assessee to demonstrate that the AO had examined the disputed matters.

The TDS issue also offers a practical lesson: a new provision’s commencement date must be built into the reconciliation. Annual purchase totals alone did not establish a default here.

Two limits deserve attention. The order does not decide whether every instance of short deduction attracts section 40(a)(ia), because it found no short deduction on the facts. Equally, payment before year-end should not be presented as a universal immunity from section 68; the Tribunal’s conclusion must be read with the supporting evidence and its findings on the transactions.

Ultimately, both foundations of the revision failed. Section 263 could not survive allegations contradicted by the very records under examination.

FULL TEXT OF THE ORDER OF ITAT SURAT

Feeling aggrieved by the revision-order dated 20.01.2026 passed by learned Pr. Commissioner of Income-Tax, Valsad [“Ld. PCIT”] u/s 263 of Income-tax Act, 1961 [“the Act”], which in turn arises out of the assessment-order dated 20.03.2024 passed by learned Assessment Unit of Income-tax Department [“Ld. AO”] u/s 143(3) r.w.s. 144B of the Act for Assessment-Year [“AY”] 2022-23, the assessee has filed this appeal on the grounds raised in Appeal-Memo (Form No. 36).

2. The background facts leading to present appeal are as under:

(i) The assessee filed return of income of relevant AY 2022-23, which was subjected to scrutiny-assessment. Ultimately, the Ld. AO completed assessment u/s 143(3) r.w.s. 144B vide order dated 20.03.2024.

(ii) Subsequently, the Ld. PCIT examined the record of assessment-proceeding and viewed that the assessment-order passed by Ld. AO was erroneous in so far it is prejudicial to the interest of revenue, which attracted revisionary-jurisdiction u/s 263. Accordingly, the Ld. PCIT issued show-cause notice dated 12.12.2025 and finally passed revision-order dated 20.01.2026 u/s 263.

(iii) Aggrieved by such revision-order, the assessee has come in present appeal before us.

3. Ld. AR for assessee carried us to the impugned order and pointed out that the Ld. PCIT has identified following two issues for terming the assessment-order passed by Ld. AO as erroneous-cum-prejudicial to the interest of revenue and thereby invoking the provision of section 263:

(i) The Ld. AO has failed to make addition u/s 68 in respect of sundry creditors.

(ii) The Ld. AO has failed to make disallowance u/s 40(a)(ia) on account of short-deduction of TDS u/s 194Q.

4. Having explained the basis of revision done by Ld. PCIT, the learned Representatives of both sides advanced their respective submissions on the aforesaid issues. For the sake of convenience, we adjudicate these two issues one by one:

Issue (i) – Addition u/s 68 in respect of sundry creditors:

5. The Ld. PCIT has observed that during assessment-proceeding the Ld. AO issued notices u/s 133(6) to following creditors but no response was received from them:

The Ld. PCIT has further noted that the assessee had also failed to furnish documentary evidences of transactions with those creditors. Hence, the sources of credits remained unexplained but the Ld. AO has failed to treat such creditors as unexplained income u/s 68.

6. Ld. AR for assessee submitted that the observations made by Ld. PCIT are factually incorrect. In support, Ld. AR drew our attention to the following:

(i) That, the Ld. AO raised following enquiry through notice u/s 142(1) dated 17.02.2024 (Page 104 of Paper-Book):

“8. Please refer to the group summary – Sundry Creditors. With regard to the following persons please upload the copy of the tax invoice of the same amount as reflecting in the group summary. Also, please upload the last payment detail made to these persons with Bank Statement. Also, please upload supporting documentary evidences of payment in subsequent year, if any made:

1. Geetaben Subhashbhai Desai (Gandevi)- Rs. 297010

2. Hemal Subhashbhai Desai (Gandevi)- Rs. 299675

3. Jayaben Nathabhai Dobariya- Rs. 301000

4. Mahadevbhai Dhirubhai Desai (Gandev)- Rs. 297370

5. Snehal Subhashbhai Desai (Gandevi)- Rs. 304990

6. Niva Industries- Rs. 366369.00”

(ii) That, in response, the assessee filed following reply vide letter dated 04.03.2024 (Page 109 of Paper-Book):

“8. Details of Sundry Creditors whose names are listed in para 8(1) to 8(6) are enclosed. Copies of Ledger account of creditors along with the copies of bank statements are enclosed herewith. On perusal of the same, you will observe that these creditors have been paid in full during the subsequent FY. Please appreciate that we buy agro products like mangoes, etc. from these farmers/creditors which is our main raw material and we pay such creditors through banking channels only. Since these suppliers who are small scale farmers are not organized businessmen they do not have any formal bill book and, hence, confirmations of ledger accounts countersigned by them are enclosed herewith for your reference and record. (Annexure-8)”

That, the documentary evidences including ledger confirmations of the parties referred to in the reply, were also filed before Ld. AO, the same are available at Pages 122-174 of Paper-Book.

7. Ld. AR thereafter drew us to the above documents filed by assessee to Ld. AO during scrutiny proceedings and demonstrated that in the cases of Geetaben Subhashbhai Desai, Hemal Subhashbhai Desai, Mahadevbhai Dhirubhai Desai and Snehal Subhashbai Desai, there are not purchases made during the year and consequently, there is no credit entry. Further, in the case of Jayaben Nathabhai Dobariya, all purchases were made during the year but the assessee has made payments through banking channel during the year itself and there is no outstanding balance as on last day of the year. Therefore, Ld. AR contended, when there is no credit entry in the current year or the credit entries have been paid during the year itself, no addition can be made u/s 68.

8. With above submissions, Ld. AR contended that on one hand the Ld. AO has made satisfactory enquiries qua the creditors and on other hand, there are no credit entries during the year or outstanding credits as on last date of the year for which the addition u/s 68, as alleged by Ld. PCIT, could have been made. Hence, this issue raised by Ld. PCIT is meritless.

9. Per contra, Ld. DR for revenue supported the revision-order and made following submissions:

(i) That, the Ld. PCIT has passed the revision-order ex-parte.

(ii) That, the Ld. PCIT has only directed the Ld. AO to re-examine the issue and has not made any kind of addition. Therefore, there cannot be any prejudice to assessee.

(iii) That, the notice sent by AO to the creditors u/s 133(6) were not responded. Therefore, the AO should have examined the matter in further detail.

10. In re-joinder, Ld. AR submitted that it is a settled judicial view that addition u/s 68 cannot be made just because the notices u/s 133(6) are not responded by parties. He submitted that the AO has rightly refrained from making addition u/s 68.

11. We have considered rival submissions of both sides qua this issue. Upon a careful consideration, we firstly find that the Ld. AO has made enquiries from assessee qua the six creditors picked by Ld. PCIT and in response to same, the assessee has also filed replies supported by documentary evidences. Thus, the assessee has sufficiently discharged the primary burden cast upon it. In so far as the notices u/s 133(6) issued by Ld. AO to the creditors remaining un-responded by those creditors, the judicial view is that the assessee is not having any control over the concerned creditors and if they do not respond, the AO cannot make any addition u/s 68 for this reason when the primary documents relating to creditors are placed by assessee.

12. That apart, the Ld. AR for assessee has also shown an important fact that out of six creditors, the assessee has not made any purchase from four creditors during the current year. Further, in one creditor’s case, there are purchase entries but the assessee has made full payment through banking channel during the year itself leaving no outstanding balance at the year-end. When it is so, the assessee is right in claiming that no addition could be made u/s 68.

13. In these facts, we are unable to agree with the Ld. PCIT that the assessment-order, in so far as this issue is concerned, is erroneous and prejudicial to the interest of revenue.

Issue (ii) – Disallowance u/s 40(a)(ia) for short deduction of TDS u/s 194Q:

14. The Ld. PCIT has observed that the assessee made total purchases of Rs. 3,18,11,258/- from following four parties above threshold limit for making TDS u/s 194Q:

However, the assessee deducted TDS u/s 194Q out of purchases of Rs. 1,87,58,087/- only. Thus, there is a short-deduction of TDS out of the purchases of Rs. 1,30,53,171/-. The Ld. AO has failed to disallow Rs. 39,15,951/- [30% of purchases of Rs. 1,30,53,171/-] u/s 40(a)(ia) for non-deduction of TDS.

15. Ld. AR for assessee submitted that the observations made by Ld. PCIT are factually incorrect. In support, Ld. AR drew our attention to the following:

(i) That, the Ld. AO raised following enquiry through notice u/s 142(1) dated 21.07.2023 (Page 70 of Paper-Book):

“9. Please upload the purchase and sales ledger.

10. Please upload the party-wise purchase details.”

(ii) That, in response, the assessee filed following reply vide letter dated 16.08.2023 (Page 76 of Paper-Book):

“9. Purchase Register as well as Sales Register for the period 01.04.2021 to 31.03.2022 has been uploaded for your perusal (Annexure-7).

10. Partywise details of Purchases made alongwith names and addresses and PAN of the suppliers are enclosed herewith. Since the details are voluminous and time consuming, details of purchases exceeding Rs. 1,00,000/- from each supplier alongwith their names and addresses are enclosed (Annexure-8).”

(iii) That, the Ld. AO made following further enquiry through notice u/s 142(1) dated 17.02.2024 (Page 105 of Paper-Book):

“10. Please furnish the Form 24Q, 26Q and 27EQ, if any”

(iv) That, the assessee made following reply vide letter dated 04.03.2024 (Page 109 of Paper-Book):

“10. Copies of Acknowledgement of TDS Return filed, Copies of Form 26Q and Form 27EQ are enclosed herewith (Annexure-10).”

(v) That, the assessee also filed Ledger A/cs of all four parties before the Ld. AO, copies of which are available at Pages 235-240 of Paper-Book.

16. Thus, referring to above documents, Ld. AR submitted that TDS u/s 194Q was introduced in the statute w.e.f. 01.07.2021 and the assessee has deducted TDS out of all purchases made after 01.07.2021. Ld. AR referred the entries of purchases and corresponding TDS made by assessee after 01.07.2021 appearing in Ledger A/cs of parties. During hearing, Ld. AR also filed a concise chart of TDS to demonstrate that the TDS was properly made in relation to the purchases made after 01.07.2021.

17. Per contra, Ld. DR for revenue supported the revision-order. He also made the very same submissions as narrated by us in Para 9(i) & (ii).

18. We have considered the enquiries relied upon by Ld. AR. At first, we find that the Ld. AO has made enquiries qua purchases and TDS aspects and the assessee has filed details and documents to Ld. AO. Upon a careful consideration of those documents, we find that the assessee has deducted TDS u/s 194Q as required in law from 01.07.2021. However, the Ld. PCIT has considered the purchase of whole financial year 2021-22 and inferred that there was short-deduction of TDS. We find merit in the submission of Ld. AR that there was no short-deduction of TDS. The submission made by Ld. AR remains undisputed by revenue. In these circumstances, the short-deduction of TDS alleged by Ld. PCIT is not established on the material available on record and the Ld. AO cannot be faulted for not making disallowance u/s 40(a)(ia). Thus, we agree that the assessment-order cannot be termed as erroneous-cum-prejudicial for issue (ii) also.

19. In view of above, we are of the view that the Ld. PCIT was not justified to invoke revisionary action qua either of the two issues discussed in foregoing paras. We, thus, quash the revision-order and restore the original assessment-order passed by Ld. AO. The assessee succeeds in this appeal.

20. In result, this appeal is allowed.

Order pronounced in open court on 30/09/2026