ITAT Delhi Cuts Bogus Creditors Addition from ₹3.50 Cr to ₹45 Lakh

Smt. Sudha Loyalka Vs ITO (ITAT Delhi)

ITAT Delhi Cuts ₹3.50 Cr Bogus Creditor Addition to ₹45 Lakh – Only 25% Disallowance Sustained Cash Payments Below ₹20K Raise Doubts – Tribunal Partly Upholds Disallowance HC Remand Leads to Relief – ITAT Applies Section 37, Narrows Addition to ₹45 Lakh

Background

• Assessee: Smt. Sudha Loyalka, proprietor of M/s Tirupati Industries, engaged in fabric & garment trading.
• Scrutiny Reason: Large sundry creditors (₹6.77 Cr).
• AO’s Findings (143(3), 18.03.2015):

-Issued notices u/s 133(6) to 27 creditors (₹3.48 Cr).

-20 notices (₹2.78 Cr) returned unserved (“wrong/incomplete address”).

-Concluded creditors were non-existent; added ₹3.50 Cr as bogus creditors.

• CIT(A) (01.12.2016): Confirmed addition.
• ITAT (18.07.2018): Deleted addition.
• Delhi HC (30.07.2024, ITA 607/2019): Set aside ITAT’s deletion, remanded to ITAT to re-examine creditors in light of s.37 (allowability of expenditure).

Tribunal’s Findings on Remand

1.Scope of HC Directions

• HC said: Not a case for s.69C (unexplained expenditure).
• Directed ITAT to re-examine allowability u/s 37.
• No adverse comment on ITAT’s earlier finding that purchases/sales existed.

2. Analysis of Creditors

• Total creditors added: ₹3.50 Cr.
• Included opening balances ₹1.90 Cr – not related to current year purchases, hence no disallowance.
• Purchases during year from these parties: ₹2.08 Cr.
• Example: M/s Erica Enterprises – purchases ₹27.22 lakh, but AO added only ₹5.5 lakh difference. Balance treated as genuine.
• Sales corresponding to purchases accepted; VAT input claimed. Thus, goods existed, but creditor parties doubtful.

3. Payment Pattern

• Payments made in cash, in small amounts below ₹20,000, across subsequent years.
• Tribunal: suspicious & casts doubt on genuineness of parties, though purchases cannot be denied since sales accepted.

4. Estimation of Disallowance

• Purchases ₹2.08 Cr – after excluding Erica’s ₹27.22 lakh (accepted), balance ₹1.81 Cr remained.
• To balance revenue leakage vs. genuine purchases:
• Tribunal restricted disallowance to 25% of ₹1.81 Cr = ₹45.32 lakh.

Decision

• Out of ₹3.50 Cr addition, sustained ₹45.32 lakh as disallowance.
• Balance deleted.
• Appeal partly allowed

FULL TEXT OF THE ORDER OF ITAT DELHI