Smit Navnitlal Soni Vs ITO (ITAT Ahmedabad)
GST late fee is not expenditure for an unlawful purpose; deduction cannot be denied under Section 37(1): ITAT
Legal principle and decision
The Income Tax Appellate Tribunal, Ahmedabad, held that statutory GST late fee cannot be treated as expenditure incurred for a purpose constituting an offence or prohibited by law. It consequently deleted a ₹30,400 disallowance under Explanation 1 to section 37(1).
The Tribunal separately restored additions of ₹52,25,000 under section 69 and ₹8,78,972 as undisclosed business income to the jurisdictional AO for verification. It emphasised that the assessee must substantiate his explanation through relevant documents and bank reconciliation, but cannot be subjected to endless tests merely to satisfy the Revenue authorities.
Three additions challenged before Tribunal
The assessee appealed against the CIT(A), NFAC’s order dated 23.02.2026 for assessment year 2021-22. The dispute involved capital introduced into his proprietary business, differences between bank credits and trading-account receipts, and GST late fee.
The assessee attributed the first two additions to a misunderstanding concerning business bank accounts and his personal savings bank account.
He explained that capital was transferred from personal funds rather than generated through an undisclosed investment source. The Revenue authorities, however, considered the source inadequately substantiated and sustained the additions. The Tribunal examined the capital and bank-credit issues together before addressing the late-fee disallowance.
Explanation for capital introduced into business
The assessee submitted that the capital came from his personal Bank of Baroda savings account and a personal fixed-deposit overdraft account.
The sources identified included repayment of an interest-bearing loan previously advanced to Palm Electric Co., LIC maturity proceeds and FD/OD withdrawals. He maintained that the original loan belonged to his personal financial affairs, rather than the proprietary business accounts examined by the authorities.
He also stated that interest earned from the borrower had been offered to tax in assessment years 2018-19, 2019-20 and 2020-21. The returned principal was deposited into his personal bank account before introduction into the business.
CIT(A) found documentary linkage inadequate
The CIT(A) concluded that the assessee had not conclusively established the capital’s source. It noted the absence of contemporaneous loan documentation and an adequate banking trail proving the original advance.
The borrower’s confirmation was considered self-serving without supporting evidence. The CIT(A) also found that LIC maturity and FD/OD receipts had not been correlated by date and amount with capital-introduction entries.
Regarding the separate ₹8,78,972 addition, the authority held that the assessee had not supplied a consolidated reconciliation mapping bank credits to recorded turnover or non-taxable receipts. It therefore confirmed both additions.
Section 69 requires examination of actual facts
The Tribunal explained that section 69 concerns investments not recorded in the books, where their nature and source remain unexplained or the explanation is unsatisfactory.
Here, the capital addition had been disclosed, and the AO identified it from details furnished in response to assessment notices. The assessee also identified the funds as his own and explained their stated sources.
The Tribunal nevertheless recognised that an explanation must be substantiated. It found a gap between the assessee’s account of the transactions and the authorities’ understanding, requiring clearer documentary examination rather than immediate acceptance of either position.
Bank reconciliation directed on remand
The Tribunal stated that bank-statement reconciliation, borrower confirmation and documents establishing LIC maturity and FD/OD withdrawals would sufficiently substantiate the explanation if they established the asserted facts.
It restored the first two grounds to the jurisdictional AO, giving the assessee an opportunity to explain entries across the different accounts.
The AO must verify the loan, its repayment and the corresponding banking entries. Once the explanation is established, the Tribunal stated, neither the section 69 addition nor the alleged bank-credit difference would survive. These grounds were allowed for statistical purposes, without final deletion of the disputed amounts.
GST late fee distinguished from prohibited expenditure
The Tribunal separately examined the ₹30,400 GST late fee disallowed under Explanation 1 to section 37(1).
It described the late fee as a statutory payment associated with delay, effectively intended to recover loss to the exchequer. Such payment could not be regarded as expenditure incurred for an unlawful purpose.
The Tribunal explained that Explanation 1 targets expenditure whose purpose itself constitutes an offence or is prohibited by law. It illustrated the distinction through expenditure incurred to offer a bribe, where the intended purpose is inherently unlawful.
Statutory payment did not attract Explanation 1
According to the Tribunal, the provision could not be extended to disallow a payment mandated by statute as interest or late fee for delay or a similar unintended infraction.
The purpose of paying the late fee was statutory compliance, rather than pursuit of an unlawful objective. The disallowance was therefore deleted, and the third ground was allowed.
The ruling concerned the GST late fee before the Tribunal; it did not determine the treatment of every levy described as a penalty.
Final outcome
The appeal was partly allowed. The GST late-fee disallowance was deleted outright, while the capital and bank-credit additions were restored for verification. Their ultimate treatment depends on the assessee establishing the claimed sources and reconciliation.
Cases Discussed
- CIT v. P. Mohanakala (291 ITR 278) (SC) — cited in the reproduced CIT(A) findings regarding satisfactory explanation of sources; not separately relied on by the Tribunal for its final directions.
FULL TEXT OF THE JUDGMENT/ORDER OF ITAT AHMEDABAD
The present appeal has been filed by the Assessee against the order of the Ld. Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (hereinafter referred to as “NFAC”), Delhi (hereinafter referred to as “CIT(A)”), dated 23.02.2026 passed under Section 250 of the Income Tax Act, 1961 (hereinafter referred to as the “Act”) and relates to Assessment Year (A.Y.) 2021-22.
2. The assessee has raised the following Grounds of Appeal:
1. The Learned Commissioner of Income – Tax, (Appeals), National Faceless Appeal Centre (NFAC), Delhi has erred in confirming the addition of Rs.8,78,972/- made by the Assessing Officer for the alleged difference in sum of total credit in the bank account and the amount credited in trading account of financial statement treating the same as undisclosed income from business.
2. The Learned Commissioner of Income – Tax, (Appeals), National Faceless Appeal Centre (NFAC), Delhi has erred in confirming the addition of Rs.52,25,000/- made by the Assessing Officer as alleged unexplained investments u/s.69 of the Act treating the amount of addition in capital account of the Proprietor in the business being transferred from the personal bank account of the assessee.
3. The Learned Commissioner of Income – Tax, (Appeals), National Faceless Appeal Centre (NFAC), Delhi has erred in confirming addition of Rs.30,400/- being GST Late fee treating them as penalty.
4. The appellant craves leave to add, alter, amend or modify any of the grounds of appeal.
3. The disputes covered by Grounds of Appeal No. 1 & 2 arise, as contended by the assessee, from a misunderstanding on the part of the Assessing Officer regarding the bank accounts operated by the assessee in his proprietary business and the Savings Bank Account operated as his personal account. Apart from the generality of the observation regarding the reconciliation of the accounts, it is pertinent to reproduce the observation of the CIT(A) with regard to the addition of Rs.52,25,000/- u/s 69 of the Act. The relevant portion of the order of the CIT(A) is reproduced below:
“After careful consideration of the facts of the assessment order, submissions made by the appellant, and legal precedents, I hereby render the following decision:
Ground No. 1 & 2-
The principal issue relates to addition of Rs.52,25,000/- treated as unexplained investments under section 69 of the Income-tax Act, 1961. The AO held that the source of capital introduced was not substantiated and accordingly invoked section 69, taxing the same under section 115BBE of the Act. The appellant submitted that the capital introduced was sourced from (i) repayment of loan earlier advanced to Palm Electric Co. from his personal savings bank account, (ii) LIC maturity proceeds, and (iii) FD OD withdrawals. It was contended that the AO erred in verifying the transaction from the business balance sheet instead of the personal bank account, and that interest income from the said loan had been offered to tax in earlier years. I have carefully examined the assessment order, written submissions, confirmations filed, and bank statements referred to in the record. The central question is whether the appellant has satisfactorily discharged the onus cast upon him under section 69 of the Act, which reads:
“Where in the financial year immediately preceding the assessment year the assessee has made investments which are not recorded in the books of account, if any, maintained by him for any source of income, and the assessee offers no explanation about the nature and source of the investments or the explanation offered is not, in the opinion of the Assessing Officer, satisfactory, the value of the investments may be deemed to be the income of the assessee of such financial year.” The burden under section 69 of the Act is on the assessee to establish, with cogent evidence, the nature and source of the investment. The appellant’s explanation hinges on repayment of a loan allegedly advanced in F.Y. 2018–19.
However there are no contemporaneous loan agreement, ledger account, or independent documentary evidence evidencing grant of such substantial loan in earlier year was produced during assessment. The balance sheets of earlier years did not reflect such loan in personal capacity in any corroborative manner. The confirmation produced from Palm Electric Co. is self-serving and unsupported by banking trail establishing the original outflow in F.Y. 2018–19. The appellant failed to reconcile the quantum of loan allegedly advanced (Rs.51.56 lakhs) with reflected balances in earlier years. The LIC maturity and FD-OD receipts were not substantiated with documentary evidence correlating dates and amounts with capital introduction entries.
The appellant argued that Clause 31(b) of Form 3CD was inapplicable since the transaction was repayment of loan given and not acceptance of loan. The issue before me is not reporting compliance but evidentiary substantiation of source. Mere absence of reporting obligation does not discharge the evidentiary burden under section 69 of the Act.
The appellant has relied upon the fact that interest income was offered in earlier years. However, offering interest income per se does not conclusively prove existence of principal loan unless supported by documentary trail. The Hon’ble Supreme Court in CIT v. P. Mohanakala (291 ITR 278) has held that where explanation offered is not satisfactory, addition is justified notwithstanding supporting documents if surrounding circumstances render explanation implausible. In the present case, the explanation lacks credible documentary linkage between original outflow and repayment received.
In view of the above, I am not satisfied that the appellant has conclusively established the source of capital introduction. The addition of Rs.52,25,000/- under section 69 of the Income-tax Act, 1961 is therefore confirmed. Grounds are dismissed.
Ground No. 3
The AO observed discrepancy between total credits in bank accounts and receipts credited in the trading account and treated the difference of Rs.8,78,972/- as undisclosed business income.
The appellant contends that (i) there was confusion between personal and business bank accounts, (ii) the balances reflected in the ITR pertained to business accounts only, and (iii) no opportunity for reconciliation was granted. On perusal of assessment records, it is evident that notices under section 142(1) of the Income-tax Act, 1961 were issued calling for bank statements and explanations. The appellant did respond during assessment proceedings. Thus, the contention of denial of opportunity is not borne out from record.
The AO has compared total non-transfer credits in the two identified accounts with receipts disclosed in trading account and noted discrepancy. The appellant, in appellate proceedings, has furnished generalized explanations but has not produced a consolidated reconciliation statement mapping each credit entry to recorded turnover or non-taxable receipt. Mere assertion that total business credits exceed turnover does not suffice and each discrepancy must be specifically explained. In the absence of proper reconciliation supported by documentary evidence, and considering that the burden to explain bank credits lies on the assessee under settled law, the addition of Rs.8,78,972/- is upheld. Ground is dismissed.”
4. We have gone through the orders of the authorities below which also contained the submissions of the assessee filed before the CIT(A). In response to the enquiry by the Assessing Officer regarding the source of funds for the additions made to capital, the assessee had submitted that the said addition came from his own personal account, a Savings Bank account maintained with Bank of Baroda, Nehrunagar Branch, Ahmedabad. A part of the fund also came from personal FD/OD account with the same Branch. The assessee has further explained that funds in his personal Savings Bank account was received by way of repayment of interest bearing loan given to one Palm Electric Co. (Prop: Vishal Anilbhai Shau). The A.O. as well as the CIT(A) have proceeded on the basis that the explanation offered by the assessee was not satisfactory and the assessee, as stated by the CIT(A), did not conclusively establish the source of capital introduction.
5. Section 69 of the Act comes into operation where the assessee has made investments which are not recorded in the books of account maintained by him and when noticed by the assessing officer, the assessee is unable to offer any explanation about the nature and source of the investment or the explanation offered by the assessee is not satisfactory in the opinion of the assessing officer, then the value of such investment may be deemed to be income of the assessee. The underlying assumption for the application of section 69 is that the assessee has some undisclosed source of fund which was utilized for making the investment which also remained unrecorded in the books of account and unless the assessee is able to offer a satisfactory explanation, then that undisclosed investment is deemed to be income of the assessee.
6. In the present case, we notice that the addition to capital has been disclosed by the assessee and the assessing officer has picked up the same from the details filed by the assessee in response to the notices issued u/s 142(1) of the Act. In addition, the assessee has stated that it is his own fund that has been introduced as capital in the proprietary business. It has been the assessee’s contention that the first hurdle of Section 69 was crossed when the assessee had disclosed that the funds as his own and he had offered the sources from which he had received the funds to introduce the same as capital. There is a gap in the understanding of the assessee and the assessing officer (affirmed by the CIT(A)) in the explanation regarding the source of funds. The assessee has repeatedly asserted that it had provided an interest bearing loan to one Palm Electric Co. in the preceding years and that it had earned interest income from the said borrower which was offered to tax in Asst. Years 2018-19, 2019- 20 and 2020-21. The money received back from Palm Electric Co. was deposited by the assessee in his personal Savings Bank account maintained with Bank of Baroda, Nehrunagar Branch, Ahmedabad.
7. The Ld. CIT(A) held that there were no contemporaneous loan agreement, ledger account or independent documentary evidencing grant of such substantial loan in earlier year. It is also stated that the confirmation produced from Palm Electric Co. is self-serving and unsupported by banking trial establishing the original outflow in the financial year 2018-19. The Ld. CIT(A) also held that the receipts from maturity of LIC Policy and withdrawal of FD/OD were also not substantiated with documentary evidence correlating traders and amounts with capital introduction.
8. While it is important for the assessee to substantiate its own contention with reference to documents and relevant entries in the bank account, the assessee cannot be put to endless tests for the sake of satisfaction of the revenue authorities. Once the assessee has claimed the funds to be his own and has explained how the stated amount has come into his possession, he needs to establish the correctness of the claim. Reconciliation of the bank statements, confirmation from the borrower who had repaid the loans and the facts/documents establishing maturity of LIC Policy and withdrawal from FD/OD will sufficiently substantiate the assessee’s contention and Section 69 would not be applicable in such a case.
9. We therefore set-aside the order of the CIT(A) and restore the case to the Jurisdictional Assessing Officer on the issues covered in assessee’s grounds of appeal no. 1 and 2 to provide an opportunity to the assessee to produce relevant details and explain clearly the entries in the different bank account, so that the assessing officer is satisfied that the assessee’s contention regarding the loan repayment thereof and the relevant bank entries are correct. Once this is established the addition u/s 69 and the addition of Rs.8,78,972/- as the alleged difference total credit in bank account and the amount credited in trading account in the financial statements, will not survive. The assessee’s grounds of appeal no. 1 and 2 are allowed for statistical purposes.
10. Regarding Ground of Appeal No. 3: The assessee has challenged the decision of the CIT(A) confirming the disallowance of Rs.30,400/- being Late fee under GST under Explanation 1 to section 37(1) of the Act. GST is an indirect tax where the assessee, as the trader, has the primary liability to pay the tax and the ability under the statute to recover the tax from his customer. In case there is a delay in the process of payment, a Late fee is prescribed under the statute and it is effectively a statutory payment designed to recover any loss to the exchequer on account of delayed payment of tax.
11. This expenditure incurred by way of payment of Late fee cannot be regarded as expenditure incurred for “any purpose which is an offence or which is prohibited by law”. Explanation 1 seeks to disallow the business expenses allowable u/s 37(1), only when the purpose of incurring that expenditure is in itself an offence or prohibited by law. To cite an example, when a person incurs an expenditure for offering a bribe or in any such similar circumstance where the purpose itself is an offence, the expenditure is not allowable as a business expenditure. This cannot be interpreted to disallow an expenditure which is paid by an assessee under statutory provision mandating the payment of any interest or Late fee for a delay or such similar unintended infraction of law. This disallowance is deleted.
12. The assessee’s Grounds of Appeal No. 3 is allowed.
13. In the result, the appeal of the assessee is partly allowed.
This Order is pronounced on 16/10/2026
