Parker Kadermohideen Gani Vs ITO (ITAT Kolkata)
Kolkata ITAT: Sundry Creditors Cannot Be Branded Bogus Without a Specific Show-Cause Notice – AO Directed to Reassess De Novo After Confronting Assessee
The assessee, engaged in the perfumery trading business through two proprietary concerns, filed his return declaring income of ₹2.75 lakh. The case was selected for limited scrutiny to verify large sundry creditors. Following enquiries under Section 133(6), the AO treated three outstanding liabilities as bogus and made additions aggregating to ₹23.21 lakh—₹15.58 lakh relating to Fragrance International, ₹6.83 lakh relating to S.H. Kelkar & Co. and ₹79,521 relating to Supreme Agency.
The Addl./JCIT(A) deleted the ₹15.58 lakh addition relating to Fragrance International, noting that primary evidence was available and that mere non-compliance with summons could not justify an addition when the transactions and subsequent repayments were supported by the ledger and bank records.
However, the ₹6.83 lakh outstanding to S.H. Kelkar & Co. was sustained by invoking Section 41(1). Though it was admittedly an opening balance brought forward from earlier years, the appellate authority considered that the liability had ceased because it remained unpaid for about ten years and the creditor had denied transactions during the relevant year.
The ₹79,521 liability towards Supreme Agency was also sustained because the Section 133(6) notice had returned unserved and the assessee’s claim of subsequent cash payment was supported only by its own ledger without independent corroborative evidence.
Before the ITAT, the assessee raised an important procedural objection: the AO had made the additions treating the outstanding creditors as bogus without first issuing a specific show-cause notice proposing such additions and confronting the assessee with the reasons for doing so. The assessee therefore sought an opportunity to furnish the necessary evidence.
The Tribunal accepted the plea and set aside the Addl./JCIT(A)’s order, restoring the matter to the AO. Importantly, it specifically directed the AO to issue a show-cause notice containing (i) the allegation that the sundry creditors are bogus, (ii) the proposed addition, and (iii) the reasons for proposing the addition. The assessee must then be permitted to produce evidence in rebuttal.
The AO was thereafter directed to make the assessment de novo in accordance with law. The assessee’s appeal was partly allowed for statistical purposes.
Key takeaway: An AO should not convert an enquiry into sundry creditors into an addition for “bogus liabilities” without specifically confronting the assessee with the allegation, proposed addition and reasons. A meaningful show-cause notice is an essential part of the opportunity of hearing; the assessee must be allowed to rebut the proposed inference with evidence before the addition is made.
Cases Discussed:
- Samrat Finvestors Private Limited (ITAT Kolkata), ITA No. 1035 to 1038/KOL/2025
- CIT vs. M/s. Naina Distributors Pvt. Ltd. (Calcutta High Court), [ITAT/113/2023 & IA No. GA/1/2023]
- Crystal Networks (P.) Ltd. v. CIT (Calcutta High Court), [2013] 35 taxmann.com 432/353 ITR 171
- Crystal Networks (P.) Ltd. v. Commissioner of Income-tax (Calcutta High Court), 353 ITR 171
- CIT v. Rohini Builders (Gujarat High Court), [2002] 256 ITR 360 /[2003] 127 Taxman 523
- Orissa Corporation (Supreme Court), 159 ITR 360
- Nemi Chand Kothari (Gauhati High Court), 136 Taxman 213
FULL TEXT OF THE ORDER OF ITAT KOLKATA
This appeal filed by the assessee is against the order of the Addl/JCIT(A)-2 Delhi [hereinafter referred to as Ld. ‘Addl/JCIT(A)’] passed u/s 250 of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) for AY 2014-15 dated 31.12.2025.
