Section 68 Addition Unsustainable Where AO Accepted Part of Same Credit Transactions: ITAT Ahmedabad

Pallavi Nileshbhai Shah Vs ITO (ITAT Ahmedabad)

Section 68 Addition Unsustainable Where AO Accepted Part of Same Credit Transactions; ITAT Ahmedabad Upholds Addition for Low Household Withdrawals Due to Lack of Evidence; ITAT Deletes Sundry Creditor Addition Because Revenue Failed to Dispute Subsequent Payments; Freight Expense Disallowance Upheld Because Transporter Declarations Were Incomplete.

The ITAT Ahmedabad partly allowed the appeal filed by the assessee for Assessment Year 2022-23 against the order of the CIT(A), NFAC. The appeal involved three issues relating to low household withdrawals, addition of outstanding creditors under Section 68, and disallowance of freight expenses under Section 40(a)(ia).

On the first issue, the Assessing Officer noted that the assessee had shown household withdrawals of only Rs.98,325/- during the relevant year as compared to Rs.4,43,507/- in the immediately preceding year. Considering the returned income of Rs.22.46 lakh, the AO estimated household expenses at Rs.4.20 lakh per annum and added Rs.3,21,675/- as unexplained low household withdrawals. The assessee contended that household expenses were borne by the spouse, but no documentary evidence or details of expenses incurred by the spouse were furnished. The CIT(A) confirmed the addition, and the Tribunal also upheld it, observing that the assessee failed to provide cogent evidence supporting the explanation or justify the sharp decline in withdrawals compared to the earlier year.

The second issue related to addition of Rs.28,92,227/- under Section 68 in respect of outstanding creditors comprising dues payable to AS Industries, Esskay Steel Industries, and M.J. Rana & Co. The outstanding balances related to purchases of waste and scrap and legal expenses. The assessee submitted ledger accounts, bank statements, and details showing that the entire outstanding balances were subsequently paid through banking channels in the succeeding year. However, the AO made the addition on the ground that confirmations, copies of income tax returns of creditors, and supporting bills were not furnished. The CIT(A) upheld the addition, holding that the assessee failed to establish identity, creditworthiness, and genuineness of the creditors.

The Tribunal disagreed with the findings of the lower authorities. It observed that the AO had accepted the genuineness of transactions to the extent amounts were repaid during the year but treated only the year-end outstanding balances as unexplained without assigning any specific reason for such differential treatment. The Tribunal noted that if the Revenue doubted the genuineness of the transactions, the entire credits should have been added and not merely the outstanding portion. It also observed that the assessee had demonstrated payment of the outstanding balances in the succeeding year through banking transactions and this fact remained uncontroverted by the Revenue. Accordingly, the Tribunal held that the addition under Section 68 was unsustainable and directed deletion of Rs.28,92,227/-.

The third issue concerned disallowance of transportation and freight expenses under Section 40(a)(ia) for non-deduction of tax at source. The assessee had made freight payments exceeding Rs.35,000/- to transporters without deducting TDS and claimed that declarations under Section 194C(6) had been obtained from the transporters. The AO found the declarations incomplete because they did not mention place, date, period, or addressee and treated them as afterthoughts. Consequently, 30% of the freight expenditure amounting to Rs.1,47,605/- was disallowed under Section 40(a)(ia). The CIT(A) confirmed the disallowance. Before the Tribunal, the assessee could not controvert the factual findings of the Revenue authorities. The Tribunal therefore upheld the disallowance, holding that failure to deduct TDS and incomplete declarations justified the addition.

Accordingly, the appeal was partly allowed.

FULL TEXT OF THE 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 28.01.2026 passed under Section 250 of the Income Tax Act, 1961 (hereinafter referred to as the “Act”) and relates to Assessment Year (A.Y.) 2022-23.

2. Grounds No.1 raised by the assessee reads as under:

“1. The Ld. CIT(A) erred in law as well as on fact in upholding an addition of Rs. 3,21,675/- made by Ld. AD on account of lower withdrawal by Incorrect analysis of earlier years data and ignoring explanation and facts submitted to clarify the same.”

3. The issue involved in the above ground relates to addition made to the income of Rs.3,21,675/- on account of low household withdrawal.

4. Briefly stated, the AO noted the assessee to have declared withdrawal of Rs.98,935/- during the year for household expenses as compared to the drawings for immediately preceding year i.e. A.Y. 2021-22 shown as Rs.4,43,507/-. Therefore, considering the previous year drawings, the AO estimated amount of Rs.35,000/- per month totaling to Rs.4,20,000/- as needed for household purposes and noting the assessee to have shown withdrawal of only Rs.98,935/-,therefore, balance of Rs.3,21,065/- was added to the income of the assessee.

5. CIT(A) confirmed the addition holding at para 6.4(i) of his order as under:

“(i) Regarding issue of addition on account of low household withdrawals:

The AO observed that the assessee declared withdrawals of only Rs.98,325/-during the year as against significantly higher withdrawals in the earlier year and considering the returned income of Rs.22.46,554/-, estimated household expenses at Rs.4,20,000/-per annum. The assessee failed to furnish cogent documentary evidence to substantiate that household expenses were met by the spouse. No conclusive evidence such as spouse’s household expense details or correlation of withdrawals with actual expenditure was produced. The explanation furnished remains unsubstantiated. Considering the income level and overall facts, the estimation made by the Assessing Officer is reasonable and based on sound logic. I find no infirmity in the action of the Assessing Officer. Accordingly, the addition of Rs.3,21,675/-.”

6. We have heard both the parties. The Revenue authorities below have consistently noted the fact of the assessee having shown withdrawals of only Rs.98,325/- for household purposes in the impugned year as opposed to Rs.4,43,507/- in the immediately preceding year. The assessee’s contention that household expenses were made by his spouse had been noted by the authorities below to have not been substantiated with documentary evidence by way of evidences being filed of expenses by spouse. he above facts have remained uncontroverted before us. In the light of the same, the fact remains that the assessee has shown unreasonably low household withdrawals as compared to the preceding year and has given no cogent reasons for the same also. He has also not furnished any evidence of household expenses having been incurred by his spouse. We, therefore, confirm the order of the Ld. CIT(A) upholding the addition made by the AO of Rs.3,21,675/- on account of low household withdrawal.

7. Ground of appeal no.1 is, therefore, dismissed.

8. Ground No.2 raised by the assessee reads as under:

“2. The Ld. CIT(A) erred in law as well as on fact in upholding an addition of Rs. 28,92,227/- made by Ld. AO being outstanding creditors u/s 68 of the Act.”

9. The assessee has challenged the addition made to its income on account of outstanding credits u/s.68 of the Act amounting to Rs.28,92,227/-.

10. Facts on record reveal that the said amount pertained to the following creditors :

i. AS Industries 14,40,198/-

ii. Esskay Steel Industries 14,14,549/-

iii. M. J. Rana & Co. 37,000/-

While the outstanding balance of the first two creditors related to Waste & scrap purchase, the outstanding balance of M.J. Rana & Co. pertained to legal expenses. The assessee had submitted following details to the AO with respect to the said creditors:

The assessee had further submitted to the AO that all the outstanding balance as at the end of the year had been paid of in the subsequent years through banking transactions, the details of which, are reproduced in page 23 & 24 of the assessment order itself. The copy of the bank statement of the assessee in HDFC Bank showing the outstanding amounts to have been paid in the succeeding year was also filed. The AO, however, disregarded all the contentions of the assessee and made addition of the outstanding balance noting that the assessee failed to submit any confirmation from the sundry creditors, their copies of ITR, and that the assessee did not submit the details of copies and bills in support of purchases made. The Ld. CIT(A) confirmed the order of the AO holding that the assessee had failed to establish identity, creditworthiness and genuineness of the transaction and that mere filing of ledger accounts was insufficient in discharge of the onus case on the assessee.

11. We are not in agreement with the findings of the authorities below. The case of the Revenue, we have noted, is that the assessee had failed to discharge its onus of proving the genuineness of the credits invoking the provisions of Section 68 of the Act. In the present case this fails completely on account of the fact that the AO has not made addition of the entire credits on account of transaction carried out that the said parties, but, only of the outstanding balance of credit as at the end of the year, which means that he has partly accepted as genuine the credit which was repaid during the year while the balance he has treated ingenuine without assigning any reason for this distinctive treatment and by making only general observation of the assessee having not discharged its onus of proving the genuineness of the transaction. By this logic of the Revenue, the entire credits needed to be added back and not only a part of it. Even otherwise, we have noted that the assessee had demonstrated to have paid off the entire outstanding balance in the succeeding year which fact the Revenue had failed to controvert either in their orders below or even before us. In the light of the above, we see no reasons to treat the amount of Rs.28,92,227/-, being outstanding sundry creditors as at the end of the year, as unexplained credits as per Section 68 of the Act. The orders of the authorities below holding so we hold are not sustainable in law and the addition so made to the income of the assessee of Rs.28,92,227/-is directed to be deleted.

12. Ground of appeal no.2 is allowed.

13. Ground No.3 raised by the assessee reads as under:

“3. The Ld. CIT(A) erred in law as well as on fact in upholding disallowance of transportation/freight expense @ 30%, Rs. 1,47,605/-made by Ld. AO u/s 40(a) (ia) of the Act.”

14. The issue involved in the above ground relates to addition made to the income of the assessee on account of non-deduction of tax at source on expenses incurred by the assessee by way of transportation/freight expenses u/s 40(a)(ia) of the Act. The disallowance being made @30% of the expenses so incurred without TDS resulting in a disallowance of Rs.1,47,605/-.

15. The facts relating to the case are that the assessee was found to have made payment to the following transporters in excess of Rs.35,000/- without deducting tax at source:

The assessee contended that the said creditors had submitted declaration under Section 194C(6) of the Act for non-deduction of tax at source. However, the AO perused the said declarations found that they did not contain place, date, period and to whom it was addressed. The AO, accordingly, held that the declarations appear to be after thought and the same was, therefore, rejected by him. The AO, thereafter, noting that the assessee had failed to deduct TDS on freight expense of Rs.4.92 Lakhs disallowed 30% of the said expenditure amounting to Rs.1,47,605/- by invoking the provisions of Section 40(a)(ia) of the Act.

16. Ld. CIT(A) confirmed the disallowance finding the assessee to have been unable to controvert the facts noted by the AO as above.

17. Before us, Ld. Counsel for the assessee was unable to controvert the facts noted by the Revenue authorities that the assessee had failed to deduct TDS on freight payment of Rs.4.92 Lakhs and the declarations allegedly furnished by the transporters u/s.194C(6) of the Act were incomplete and did not contain the place, date, period and to whom had been addressed. We, therefore, concur with the authorities below that the declaration appears to be after thought and the assessee having not deducted tax at source on the freight payment of Rs.4.92 Lakhs. The disallowance u/s.40(a)(ia) of the Act of 30% of the said expense was warranted. The disallowance, therefore, made of Rs.1.47 lakhs u/s.40(a)(ia) of the Act is confirmed.

18. Ground of appeal no.3 is, accordingly, dismissed.

19. In the result, the appeal filed by the asessee is partly allowed.

This Order pronounced on 22/05/2026