ITAT Deletes ₹3.03 Crore Addition as AO Failed to Conduct Independent Verification

ACIT- Panchkula Vs Medisys Universal Pvt. Ltd. (ITAT Chandigarh)

Additions Under Section 68 Unsustainable Due to Mere Address Mismatch, Rules ITAT;  ITAT Removes Unexplained Cash Credit Additions Because Transactions Were Through Banking Channels;  Rent Expense Disallowance Deleted Because Lack of Notarized Amendment Was Not Sufficient Ground;  ITAT Holds AO Cannot Make Section 68 Addition Without Proper Inquiry Into Creditors;  Section 68 Addition Deleted Because Assessee Proved Identity and Transactions of Creditors;  ITAT Deletes Loan Addition Because Assessee Produced Financial Statements and Debtor Records;  Additions Based on Suspicion Alone Cannot Survive Without Evidence, Says ITAT Chandigarh.

The Income Tax Appellate Tribunal Chandigarh Bench partly allowed the assessee’s appeal and dismissed the Revenue’s appeal in a dispute concerning additions made under Section 68 of the Income Tax Act and disallowance of expenses for Assessment Year 2017-18. The assessee, engaged in providing health supplements through e-commerce, challenged additions relating to rent expenses, sundry creditors, and unsecured loans, while the Revenue contested deletion of additions relating to two creditors.

The Assessing Officer had disallowed rent expenses of ₹2.55 lakh on the ground that the amendment increasing rent was not executed through a formal stamped or notarized agreement. The Tribunal observed that the rent was paid through banking channels, the owner had confirmed the arrangement, and no inquiry had been conducted from the property owner. It held that absence of a stamped amendment deed alone could not invalidate the claim and deleted the addition.

With respect to unexplained sundry creditors totaling ₹3.03 crore, the Tribunal examined three entities. For M/s Geeta Enterprises, the assessee had furnished GST details, PAN, and confirmations. The Assessing Officer questioned discrepancies relating to the proprietor’s name and common address with another entity. The Tribunal upheld the CIT(A)’s finding that there was no restriction on entities operating from the same address and that the PAN-related objection had been clarified.

Regarding M/s Ganesh Medical Store, the addition was made due to mismatch in addresses. The Tribunal noted that no independent inquiry had been conducted by the Assessing Officer at the provided address and held that address mismatch alone could not justify addition under Section 68.

For M/s Delhivery Couriers, the assessee had produced ledger accounts showing regular business transactions and payments through banking channels. The Tribunal observed that the account was a running account over several years and the outstanding amount was subsequently settled. Since no independent verification was conducted by the Assessing Officer, the Tribunal deleted the addition.

The Tribunal also considered addition of ₹29.95 lakh relating to an alleged unsecured loan from an associated entity, M/s Medisys Biotech Pvt. Ltd. The assessee furnished audit reports, financial statements, and income tax returns of the entity. During appellate proceedings, the assessee explained that the amount represented business receivables connected with online sales and commission arrangements involving associated concerns. The Tribunal noted that the assessee’s name appeared in the debtor list of the associated entity and held that the assessee had discharged the onus under Section 68. Accordingly, the addition was deleted.

The Tribunal concluded that the additions were unsustainable in absence of independent inquiry and verification by the Assessing Officer and partly allowed the assessee’s appeal while dismissing the Revenue’s appeal.

FULL TEXT OF THE ORDER OF ITAT CHANDIGARH

1. Aforesaid cross-appeals for Assessment Year (AY) 2017-18 arises out of an order of learned Commissioner of Income Tax (Appeals), NFAC [CIT(A)] dated 02-06-2023 in the matter of an assessment framed by Ld. AO u/s 143(3) of the Act on 03-12-2019 making various additions in the hands of the assessee. The Ld. CIT(A) partially allowed the appeal of the assessee which has led to present cross-appeals before us.

2. The Ld. AR advanced argument to support the case of the assessee and referred to various documents as placed in the paper book. The Ld. Sr. DR also advanced arguments supporting the assessment as framed by Ld. AO. Having heard rival submissions and upon perusal of case records, the appeals are disposed-off as under. The assessee being resident corporate assessee is stated to be engaged in providing health supplements on commission basis through e-commerce. The substantive issues that have been urged in assessee’s appeals are – (i) disallowance of rent expenses for Rs.2,55,914/-; (ii) Additions u/s 68 for Rs.12,59,248/-; (iii) Addition of unexplained loans for Rs.29,95,000/-. The issues that arises in revenue’s appeals are – (i) Addition of unexplained creditors u/s 68 for Rs.2,27,48,198/- pertaining to M/s Geeta Enterprises; (ii) Addition of unexplained creditors u/s 68 for Rs.63,08,614/- pertaining to M/s Ganesh Medical Store. These issues are adjudicated as under.

3. Disallowance of Rent Expenses

The assessee claimed rent expenses for Rs.10,27,490/-. However, as per rent deed, the rent payable was Rs.7,71,576/-. The assessee stated that there was amendment in the rent agreement wherein through mutual agreement, the office rent of basement was increased from Rs.37,000/- to Rs.50,000/- per month. In support, the assessee furnished amendment clause as signed by the owner of the property. However, the differential of Rs.2,55,914/- was denied by Ld. AO on the ground there was no amendment deed or fresh deed and the amendment was not on stamp paper. The Ld. CIT(A) endorsed the addition as made by Ld. AO against which the assessee is in further appeal before us.

4. Unexplained Sundry Creditors

4.1 The assessee reflected sundry creditors as under: –

The assessee was accordingly required to demonstrate the fulfillment of ingredients of Sec.68.

4.2 For M/s Geeta Enterprises, the assessee furnished GST Number, PAN etc. The Ld. AO observed that the PAN belonged to Shri Ganeshi Lal. However, as per confirmation, the proprietor was shown as Shri Om Parkash Latka. The address of this entity was exactly the same as the address of M/s Ganesh Medical Store. However, Ld. CIT(A) deleted this addition on the ground that as per PAN details, Shri Ganeshi Lal was father of Shri Om Parkash Latka. Further, there was no restriction for parties to operate from same address. Aggrieved, the revenue is in further appeal before us.

4.3 For M/s Ganesh Medical Store, the assessee furnished GST Number and confirmation. However, the address of the creditor was different than as mentioned in the confirmation. Therefore, Ld. AO disallowed the same. However, Ld. CIT(A) deleted the same on the ground that no enquiry was made by Ld. AO at the given address. Mere mismatch in the address could not be a ground to make the impugned addition. Aggrieved, the revenue is in further appeal before us.

4.4 For M/s Delhivery Couriers, the assessee only furnished a ledger account. On these facts, this creditor was added by Ld. AO as unexplained cash credit u/s 68. The Ld. CIT(A) confirmed the addition against which the assessee is in further appeal before us.

5. Unsecured Loan from M/s Medisys Biotech Pvt. Ltd. (MBPL)

5.1 The assessee obtained loan of Rs.29.95 Lacs from this entity. To support the same, the assessee furnished audit report, financial statements and Income Tax Return (ITR) of that entity. However, Ld. AO did not accept the same on the ground that no loan to the assessee was appearing in the financial statement of that entity.

5.2 During first appeal, the assessee contended that MBPL was an associated entity. M/s Geeta Enterprises and M/s Ganesh Medical Store made purchases from MBPL and used the digital online marketing platform of the assessee to sell the products. The assessee charged commission for these services. The amount received from online sales was collected in the books of the assessee and credit was given to M/s Geeta Enterprises and M/s Ganesh Medical Store. These two entities were ‘Accounts Payable’ for the assessee but ‘Accounts Receivable’ for MBPL. Thus, as such there was no loan from MBPL.

However, Ld. CIT(A) confirmed the addition against which the assessee is in further appeal before us.

Our findings and Adjudication

6. So far as the disallowance of rent expenses is concerned, it could be seen that the differential rent has been disallowed merely on the ground that the amendment in rent clause was not on stamp paper or notarized. However, this fact alone, at the most, would make the document deficient but could not jeopardize the claim of the assessee that it has paid rent as per contractual terms to the owner of the property. The confirmation of the owner has already been furnished. The payment to the owner is through banking channels. There is no enquiry from the owner of the property. Therefore, this addition could not be sustained. We order so.

7. So far as addition qua M/s Geeta Enterprises is concerned, the assessee has furnished the requisite details along with confirmation. The finding of Ld. AO qua PAN was found to be erroneous by Ld. CIT(A). As rightly held by Ld. CIT(A), there was no restriction for parties to operate from same address. Therefore, this addition has rightly been deleted. Similar documents have been furnished by the assessee for M/s Ganesh Medical Store. The claim has been denied merely on difference in address. However, there is no independent enquiry by Ld. AO from loan creditors at the given addresses. Mere mismatch in the address could not be a ground to make the impugned addition. Therefore, we endorse the findings of Ld. CIT(A) for these two creditors. The revenue’s appeal stands dismissed.

8. The third creditor is M/s Delhivery Couriers. It could be observed that the assessee has availed courier and logistic services from M/s Delhivery Couriers as is evident from ledger extracts as placed on Page Nos. 185 of 192 of the paper book. Upon perusal of the same, it could be seen that this account is a running account for several years. The assessee has carried out regular business transactions with this entity and all the payments are through banking channels only. No independent enquiry has been made by Ld. AO from the payee. The outstanding amount of Rs.12,95,248/- as payable to this entity has been settled in subsequent years. On these facts, the impugned addition could not be sustained. We order so. The corresponding grounds of assessee’s appeal stand allowed.

9. The last issue is addition of Rs.29.95 Lacs with respect to M/s MBPL. It could be seen that the assessee has duly furnished audit report, financial statements and Income Tax Return of MBPL. This entity is an associated entity. The Ld. CIT(A) has denied the claim on the ground that the name of the assessee was not appearing in the financial statements of MBPL. The Ld. AR has filed list of debtors of MBPL as on 31-03-2017 wherein the name of the assessee figures at serial no.281 for Rs.17.95 Lacs. Since the assessee has amply demonstrated that the amount was outstanding and it discharged the onus of Sec.68, this addition is liable to be deleted. We order so. The corresponding grounds of assessee’s appeal stand allowed. No other ground has been urged in assessee’s appeal.

10. The revenue’s appeal ITA No.479/Chandi/2023 stands dismissed. The assessee’s appeal ITA No. 439/Chandi/2023 stands partly allowed.

Order pronounced on 28-04-2026