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.
2. The assessee is in appeal before the Tribunal raising the following grounds of appeal:
“1.) That on the facts and in the circumstances of the case, Ld. CIT(A)-NFAC’s order dated 31.12.2025 passed u/s 250 of the Income Tax Act, 1961 is erroneous and bad in law.
2.) That on the facts and in the circumstances of the case, Ld. CIT(A)-NFAC erred in confirming the addition to the tune of Rs. 6,83,055/- under the head sundry creditors in the name of S.H. Kelker and Co. by invoking provisions of section 41(1) of the Act.
3.) That on the facts and in the circumstances of the case, Ld. CIT(A)-NFAC erred in confirming the addition to the tune of Rs. 79,521/- being liability in the name of Supreme Agencies despite the fact that the same was paid in cash during the subsequent assessment year.
4.) That the appellant craves leaves to add, alter, adduce, or amend any ground / grounds on or before the date of hearing of the appeal.”
3. Brief facts of the case are that the assessee had filed the return of income for AY 2014-15 on 23.09.2014 declaring the total income at ₹2,75,360/-. The return was processed u/s 143(1) of the Act and selected for limited scrutiny to verify large sundry creditors. During the assessment proceedings, the Assessing Officer (hereinafter referred to as Ld. ‘AO’) investigated the sundry creditors by issuing notices u/s 133(6) of the Act. Due to lack of compliance or unserved notices and replies not being received, the Ld. AO treated the liabilities as bogus and made additions of ₹15,58,496/- in respect of Fragrance International, ₹6,83,055/- in respect of S.H. Kelkar & Co., and ₹79,521/- in respect of M/s Supreme Agency, determined the total income at ₹25,96,430/- u/s 143(3) of the Act. Aggrieved with the assessment order, the assessee filed an appeal before the Ld. Addl/JCIT(A), who observed that the primary evidence was on record for Fragrance International and deleted the addition of ₹15,58,496/-. However, the Ld. Addl/JCIT(A) upheld the addition of ₹6,83,055/- regarding S.H. Kelkar & Co. by invoking the deeming provisions u/s 41(1) of the Act as a c eased liability, and confirmed the addition of ₹79,521/- regarding M/s Supreme Agency due to a lack of corroborative evidence. Accordingly, the Ld. Addl/JCIT(A) modified the action of the Ld. AO and partly allowed the appeal of the assessee vide his findings as under:
“5.1 The appellant was issued notice u/s 250 of the IT Act and in response to the notice, the appellant filed written submission. On the basis of the written submission, statements of facts and the documents furnished along with the Form 35, the appeal is decided on merit.
5.2 On perusal of the inter related grounds of appeal 1-5, it is found that the appellant, an individual engaged in the perfumery trading business through two proprietorship concerns, M/s Kader Perfumery House and M/s Ruby Chemicals, filed his return of income for AY 2014-15 declaring a total income of Rs 2,75,360/-, which was processed under section 143(1). Assessment was completed under section 143(3) assessing total income at Rs 25,96,430/- after making an addition of Rs 23,21,072/- on account of alleged bogus sundry creditors relating to three parties, namely M/s Fragrance International (Rs 15,58,496/-), M/s S.H. Kelkar & Co. (Rs 6,83,055/-), and M/s Supreme Agency (Rs 79,521/-). During assessment proceedings, the AO issued notices under section 133(6) to seven creditors, out of which four parties duly confirmed their transactions, while discrepancies were noted in respect of the remaining three parties.
5.3 In the case of M/s Fragrance International, although the party confirmed the transactions and furnished ledger accounts, the AO treated the liability as bogus solely due to non-compliance with summons under section 131. The information with respect to the ledger of the party and subsequent repayment was also sought during the course of appellate proceedings. The perusal of the ledger account reveal that the appellant is regularly dealing with this party throughout the financial year 2014-15 as well and regular purchases/payment have been made. The same is also supported by the bank account statement of the appellant wherein the payment entries are clearly highlighted. It is matter of fact that though the ledger was on record during the course of appellate proceedings but the addition has been mainly made on the ground of insufficient compliance.
The Hon’ble ITAT Kolkata bench has noted various citation in its decision ITA No. 1035 to 1038/KOL/2025 Samrat Finvestors Private Limited AYs: 2012-13, 2014-15 to 2016-17
The Assessee relied on the decision of the Hon’ble Supreme Court in the case of Orissa Corporation 159 ITR 360 which was followed by the Hon’ble Gujarat High Court, in the case of Dy. CIT v. Rohini Builders [2002] 256 ITR 360 /[2003] 127 Taxman 523, wherein it was held when the assessee furnishes names and addresses of the alleged creditors and the GIR numbers, the burden shifts to the Department to establish the Revenue’s case and in order to sustain the addition the Revenue has to pursue the enquiry and to establish the lack of creditworthiness and mere non – compliance of summons issued by the Assessing Officer under section 131, by the alleged creditors will not be sufficient to draw and adverse inference against the assessee. in (In) the case of six creditors who appeared before the Assessing Officer and whose statements were recorded by the Assessing Officer, they have admitted having advanced loans to the assessee by account payee cheques and in case the Assessing Officer was not satisfied with the cash amount deposited by those creditors in their bank accounts, the proper course would have been to make assessments in the cases of those creditors by treating the cash deposits in their bank accounts as unexplained investments of those creditors under section 69.
018. The Hon’ble High Court, Calcutta in the case of Crystal Networks (P.) Ltd. v. Commissioner of Income-tax 353 ITR 171 has held that when the basic evidences are on record the mere failure of the creditor to appear cannot be basis to make addition. Further reliance was placed in the case of Nemi Chand Kothari 136 Taxman 213, (supra), wherein the Hon’ble Guahati High Court has given a further twist to the issue of onus on assessee under section 68, by holding that the same should be decided by taking into consideration the provision of section 106 of the Evidence Act which says that a person can be required to prove only such facts which are in his knowledge. The Hon’ble Court in the said case held that, once it is found that an assessee has actually taken money from depositor/lender who has been fully identified, the assessee/borrower cannot be called upon to explain, much less prove the affairs of such third party, which he is not even supposed to know or about which he cannot be held to be accredited with any knowledge. In this view, the Hon’ble Court has laid down that section 68 of Income-tax Act, should be read along with section 106 of Evidence Act.
019. Similarly, the Hon’ble Calcutta High Court in the case of Crystal Networks (P.) Ltd. v. CIT [2013] 35 taxmann.com 432/353 ITR 171 has held that where all the evidences were filed by the assessee proving the identity and creditworthiness of the loan transactions, the fact that summon issued were returned un-served or no body complied w ith them is of little significance to prove the genuineness of the transactions and identity and creditworthiness of the creditors. That Hon’ble Calcutta High Court in the case of Pr. CIT vs. M/s. Naina Distributors Pvt. Ltd. [ITAT/113/2023 & IA No. GA/1/2023] has held ‘that non-appearance of the director cannot be made a ground for addition in the hands of the assessee under Section 68 of the Act Page | 15 ITA No. 1035 to 1038/KOL/2025 Samrat Finvestors Private Limited AYs: 2012-13, 2014-15 to 2016-17 when other evidence relating to the raising of share capital qua the share subscriber were available on record as furnished by the assessee and also cross verified by the assessing officer pursuant to the enquiry conducted in response to the notices issued under Section 133(6) of the Act.
Accordingly, it is held that the mere non compliance to 133(6) and 131 cannot be ground to make addition of sundry creditors when necessary primary evidence were on record, thus the addition is deleted to extent of Fragrance International.
5.3 In respect of M/s S.H. Kelkar & Co., the party stated that there were no transactions during the relevant year, though the appellant contended that the amount represented an old outstanding balance pertaining to earlier years. The appellant has majorly challenged the addition on the ground that opening balance cannot be added in the year under consideration. The details of repayment of the amount was sought and the appellant has replied as below:
S.H. Kelkar & co
In respect of this creditor the AO mentioned that the said creditor confirmed that no such transaction between the appellant and creditor during the relevant assessment year. It is factually correct that no transaction between the creditor and the appellant was held during the relevant assessment year. Hence, the AO made the addition of Rs. 6,83,055/-. However, the balance of Rs. 6,83,055/- is opening balance brought forward from earlier years and the same figure is carried forward to subsequent assessment year as closing balance. Copy of ledger account is enclosed herewith for your ready reference.
The appellant kept the amount unpaid till date. The appellant does not want to pay the amount twice, one to SH Kelkar & Co. and another in form of taxes to the department against such addition.
The appellant agreed to pay the amount of Rs. 6,83,055/- to the said creditor once the creditor is accepted by the department.
The perusal of above reply reflects that the payment is still outstanding after passage of 10 years and the appellant has raised that the departmental dispute has become a cause of non payment, which actually means that the payment was pending till the assessment and is still pending. The appellant has not made available any communication with the alleged creditor to establish his contention and reason a creditor will wait for indefinite time for appellant to clear his revenue dispute is beyond common understanding. The best plausible explanation to this is that the liability itself has seized to exist when the creditor is not pursuing the payment and has even denied the existence of one during the course of assessment proceedings. There is no liability for the appellant to pay allegedly due to departmental dispute, simply points to a situation where no actual liability exists. As noted by the AO in its order, that the confirmation received from the creditor clearly shows that liability seized to exist in the year under consideration when the same got confirmed from the creditor itself.
Accordingly, the addition made by the AO with respect to SH Kelkar is upheld and in accordance with the provisions of Section 41(1)(a), by invoking the deeming provisions, the ceased liability amount is deemed business income for the year under consideration. The relevant section is as under:
41. (1) Where an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee (hereinafter referred to as the first-mentioned person) and subsequently during any previous year, –
(a) the first-mentioned person has obtained, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof, the amount obtained by such person or the value of benefit accruing to him shall be deemed to be profits and gains of business or profession and accordingly chargeable to income- tax as the income of that previous year, whether the business or profession in respect of which the allowance or deduction has been made is in existence in that year or not; or Thus, the addition is upheld to this extent.
5.4 In the case of M/s Supreme Agency, the notice issued under section 133(6) was returned unserved, and the AO treated the liability as non- genuine due to non-verification. The appellant during the course of the appellate proceedings has submitted that the payments have been cleared in subsequent financial year. The ledger account submitted is as follows: […] On perusal of the above ledger it is observed that the same has been produced from the books of accounts of appellant as against the ledger of fragrance International which was confirmed copy of Fragrance International books. Further, the payment have been allegedly made in cash for which no corroborative evidence has been submitted and there is no way the self-maintained ledger can be verified given the finding of the AO that the party was not found at the given address and the premises stands locked. Thus, the contention of the appellant, in view of lack of proper evidence, is not acceptable and the addition is upheld.
The appellant failed to conclusively establish the identity, creditworthiness of the creditors, and the genuineness of the liabilities to the satisfaction of the AO as well as the appellate authority. The onus to prove the genuineness of sundry creditors squarely lies upon the assessee, which has not been discharged adequately in the present case. The addition made by the AO are based on material gathered during assessment proceedings and cannot be the said to be based merely on surmise or suspicion, the contention regarding violation of principles of natural justice, as adequate opportunity was afforded during the course of assessment proceedings.
Accordingly, the addition of Rs 79,521 is upheld. Accordingly ground no 1- 5 are partly allowed. 5.5 On perusal of ground no 6, the levy of interest under section 234B is directed to be modified accordingly, and ground no 7 being premature as penalty has not been finally levied is not adjudicated. Ground No. 8 being general in nature does not require adjudication. 5.6 Accordingly, Therefore, in view of the above grounds of appeal and discussion as above, the appeal of the appellant is hereby partly allowed.”
4. Aggrieved with the order of the Ld. Addl/JCIT(A), the assessee has filed the appeal before the Tribunal.
5. Rival contentions were heard and the submissions made have been examined. The Ld. AR who appeared before us on behalf of the assessee drew our attention to page 4 of the assessment order and stated that the whole outstanding liability in respect of all the creditors has been added to the income as bogus liability. It was submitted that no show cause notice was issued before making the addition, and a copy of the ledger of the parties were produced before the Ld. Addl/JCIT(A) who did not consider the same. He, therefore, requested that the matter may be remanded to the Ld. AO with a direction to issue the show cause notice, consider the reply of the assessee, and thereafter, take a decision.
6. Ld. DR relied upon the order of the Ld. Addl/JCIT(A) and requested that the same may be confirmed.
7. We have considered the submissions made, gone through the facts of the case and perused the record and the order of the Ld. Addl/JCIT(A). Before the Ld. AO, satisfactory reply was not filed. Therefore, the order of the Ld. Addl/JCIT(A) is hereby set aside and the issue is remanded before the Ld. the Ld. AO, who is directed to issue a show cause notice containing the allegations of bogus sundry creditors, the proposed addition and the reason for the same, and the assessee is directed to produce the required evidence in support of the claim that the addition should not be made, and thereafter the Ld. AO shall make the assessment de novo as per law.
8. In the result, the appeal filed by the assessee is partly allowed for statistical purposes.
Order pronounced in the open Court on 14th August, 2026.
