Case Law Details
Shanker Mahadevan Iyer Vs ITO (ITAT Bangalore)
The Bangalore ITAT set aside additions relating to sundry creditors (₹49.43 lakh) and TDS disallowance u/s 40(a)(ia) (₹3.74 lakh), holding that both issues require fresh factual verification and proper adjudication.
On the issue of sundry creditors, the AO treated balances as unexplained u/s 68 due to:
- Non-response to notices u/s 133(6),
- Differences in balances, and
- Lack of confirmations.
However, the Tribunal noted that the assessee had submitted detailed party-wise explanations, reconciliations, ledger extracts, and invoices, but the CIT(A) failed to examine these on merits and merely reiterated general legal principles.
The ITAT held that such an approach violates principles of natural justice, as:
- No findings were given on why explanations were unacceptable,
- Evidence was not properly analysed.
Accordingly, the matter was remanded back to the AO for fresh examination with proper opportunity.
On the Section 40(a)(ia) issue, the dispute was whether the amount was:
- Expenditure (requiring TDS), or
- Income received for services rendered.
The Tribunal held that this is a purely factual issue requiring verification of ledger, invoices, and bank entries. If it is a receipt, no disallowance can be made. Hence, this issue was also restored to AO.
FULL TEXT OF THE ORDER OF ITAT BANGALORE
The present appeal filed by the assessee is directed against the order of the Learned Commissioner of Income Tax (Appeal), ADDL/JCIT (A)-2 Vadodara [hereafter- Ld. CIT(A)], under section 250 of the Income Tax Act, 1961 (hereafter- the Act), dated 15-07-2025 for the Assessment Year 2012-13.
2. The first issue raised by the assessee is that the learned CIT(A) erred in confirming the addition of Rs. 49,43,366/- made by the AO by treating the sundry creditors arising out of trading transactions being purchases and expenses as unexplained credit under section 68 of the Act.
3. The facts in brief are that the assessee, an individual, is engaged in the business of Streamer Agencies and clearing forwarding agent. In the return filed for the year under consideration, the assessee declared total loss of Rs. 86,22,161/- which was selected for scrutiny assessment. The AO, during the assessment found that the assessee in the books has disclosed sundry creditors for a sum of Rs. 1,09,59,219/- only. On question by the AO, the assessee furnished name and address of the sundry creditors with respect to 15 creditors. Accordingly, the AO issued notice under section 133(6) of the Act to those 15 sundry creditors. In case of certain parties/ creditors, notices issued under section 133(6) of the Act were returned as not found. Likewise, certain parties do not reply to the notices issued and in case of the reaming parties who made reply there were difference in closing balance shown by the assessee viz-a-viz closing balance confirmed by those parties. Hence, the AO proposed to treat the balance of unconfirmed creditor balance and differential amount as unexplained credit vide issuing a show cause notice.
3.1 In response, the assessee furnished confirmation from some parties and reconciliation statements in case of some parties. However, no such confirmation and reconciliation was furnished in respect of 8 parties which included 3 parties to whom notices were not served with remark not found, 1 party to whom the notice u/s 133(6) was served but no response was received and remaining 4 parties were those where there were differences in closing balances. In respect of these parties, the assessee argued that the balance reflected in his (assessee) books were based on genuine business transaction carried out with those parties. Further, the addresses provided by the assessee were as per record available with him (the assessee) at the time of transactions entered. Therefore, the assessee cannot be made liable in cases where address got changed by those parties afterward.
3.2 However, the AO rejected the argument of the assessee. The AO treated balance of the sundry creditors from whom no confirmation was received in response to the notices issued under section 133(6) of the Act as well as where the difference amount was observed as reflected by the assessee and amount confirmed by the sundry creditor as unexplained credit under section 68 of the Act. The addition made by the AO is detailed as under:
4. The aggrieved assessee preferred an appeal before the learned CIT(A). The assessee before the Ld. CIT(A) submitted that the AO has made an addition of ₹49,43,366 on account of sundry creditors merely on the ground that confirmations were not furnished. It was argued that the AO has not even specified the provision of the Act under which the addition has been made, which itself makes the addition unsustainable in law.
5. The assessee further submitted that there is no cessation or remission of liability in the present case. A liability can cease only if the creditor waives it, or there is discharge in law, or the assessee clearly refuses to honour it. None of these conditions are satisfied. The liabilities are still outstanding and payable in the books.
5.1 It was also argued that merely because the creditors could not be confirmed or traced at the time of verification, it cannot be presumed that the liability has ceased. Reliance was placed on the decision of the Karnataka High Court in the case of CIT vs. Alvares & Thomas, reported in 394 ITR 647 wherein it was held that non-traceability of creditors does not amount to cessation of liability.
5.2 The assessee further submitted party wise submission in support of genuineness of credit balance reported which are detailed as under:
I. Evergreen Supplies (addition of Rs. 11,874/-)
5.3 The assessee submitted that the difference of Rs. 11,874/- relates to the closing balance reported and closing balance confirmed by the said party which is arising due to difference in opening balance. There is no difference in current year transaction. In support of this claim, the assessee furnished copy of invoice raised by the said party during the year.
II. Manasa associate (addition of Rs. 2,10,156)
5.4 It was submitted that assessee carries on two concerns. One is proprietary concern of the assessee namely Mineral Shipping & Trading Co and another is M/s S.S. Maritime which was earlier a partnership firm but dissolved into propriety concern of the assessee w.e.f. 01-04-2006. The amount payable to the said party comprise liability of both concerns for Rs. 2,10,156/- and Rs. 2,24,571/- respectively. However, the ledger copy furnished by the party Manasa Associates in response to notice issued under section 133(6) consisted transaction of only one concern being M/s S.S. Maritime. Therefore, the difference of Rs. Rs. 2,10,156/- arises. In support the assessee furnished extract of ledger copy of both concern from the books of the Manasa Associates.
III. M/s Pisces Enterprises (addition- Rs. 99,830/-)
IV. M/s KC Sharma & Co (addition- Rs. 95,643/-)
V. M/s B & J Associated (addition- Rs. 37,05,827/-)
VI. M/s Hanuman Minerals (addition- Rs. 1,00,000/-)
VII. Warrior Minerals (addition – Rs. 2,35,531/-)
VIII. M/s Rodrigues & Associates (addition – Rs. 4,84,505/-)
5.5 In respect of above-mentioned parties whose ledger balances were not confirmed either due to notice issued under section 133(6) of the Act were not served or party remained nonresponsive. The assessee furnished Ledger extracts, invoices and supporting documents to establish the existence of liabilities. Accordingly, the assessee contended that the addition made by the AO is without any legal basis and prayed that the same be deleted. However, the learned CIT(A) confirmed the addition made by the AO by observing as under:
6.2 Ground 1 to 2.7:** The appellant under these grounds has disputed the addition of Rs. 49,43,366/-. The appellants submits that the AO failed to specify the provision of law under which the said addition is made and the sundry creditors are the liability of the appellant which he is required to pay as per law and he is willing to pay the same as and when he is able to pay. The appellant submits that the AO failed to note that the outstanding sundry creditors are not credited to the profit and loss account and that the appellant has not received any benefit from the sundry creditors and therefore the addition is bad is law.
In this regard, it is noted from the assessment order that the AO disallowed this aggregate amount of Rs. 49,43,366/- because of unconfirmed sundry credit balances from 8 creditors and the failure on the part of the appellant to furnish confirmation letters even after show cause notices were issued to him. The AO during the assessment proceedings issued notice u/s 133(6) of the act to the 15 sundry creditors on the address submitted by the appellant. Based on the confirmation provided by the creditors and the amount reflected in the books of accounts, the appellant was given a show cause notice and thereafter taking his submissions into consideration the AO concluded that 08 creditors were unconfirmed. The AO further noted that the appellant did not discharge its liability by either furnishing the confirmation letter even after show cause notice.
It is to be noted that the liability to prove that the creditors are genuine and not bogus lies primarily with the assessee (i.e., the taxpayer), especially when questioned by the tax authorities. This is a well-settled principle in tax jurisprudence under the Income-tax Act, 1961. When an assessee claims that certain amounts shown in the books are loans or credits from creditors, Section 68 of the Income-tax Act, 1961 becomes relevant.
Section 68 of the Income-tax Act, 1961:
“Where any sum is found credited in the books of an assessee, and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the sum so credited may be charged to income-tax as the income of the assessee of that previous year.”
This means the assessee has to prove:
1. Identity of the creditor
2. Creditworthiness of the creditor
3. Genuineness of the transaction
If the assessee fails to prove these, the sum can be added as unexplained income.
Now, in the present case the appellant managed to file the confirmation from the parties or reconcile the difference in the case of 05 creditors only. In the case of rest of the creditors either the notices sent u/s 133(6) of the act were returned back or the creditors did not reply or the creditors stated that there is a difference to the books. 02 creditors stated and confirmed that there is no balance as on 31.03.2012. It is to be noted that only 01 creditor confirmed the status.
Further, the judicial authorities have time and again stressed this fact that the liability to prove that the creditors are genuine and not bogus lies primarily with the assessee.
The following judicial citations corroborate the fact:
CIT v. Precision Finance Pvt. Ltd. (1994) 208 ITR 465 (Cal):
The Calcutta High Court held that mere furnishing of names and file numbers is not sufficient, and the onus is on the assessee to prove the identity, creditworthiness of the creditor, and genuineness of the transaction.
CIT v. P. Mohanakala (2007) 291 ITR 278 (SC):
The Supreme Court upheld additions under Section 68, noting that burden lies on the assessee to explain the nature and source of cash credits in the books of account.
CIT v. Nova Promoters & Finlease Pvt. Ltd. (2012) 342 ITR 169 (Delhi):** Held that even if identity of the creditor is established, if the transaction appears to be a sham, the AO can treat it as unexplained. The assessee must prove all three pillars: identity, creditworthiness, and genuineness.
Sumati Dayal v. CIT (1995) 214 ITR 801 (SC):
The Supreme Court emphasized applying the test of human probabilities. Where circumstances suggest the transaction is not genuine, the onus lies on the assessee to establish it as real.
Therefore, the addition of Rs. 49,43,366/- by the AO on the grounds of unconfirmed sundry creditors is as per the law and stands confirmed. The appeal is dismissed on these grounds.
6. Being aggrieved by the order of the learned CIT(A), the assessee is in appeal before us.
7. The learned AR before us filed detailed written submission against the addition of sundry creditor balance under section 68 of the Act. Among the contention the learned AR submitted that the learned CIT(A) confirmed the addition without considering the detailed submission made by the assessee during the appeal proceedings.
8. On the contrary, the learned DR vehemently supported the findings of the authorities below.
9. We have heard the rival contentions of both the parties and perused the materials available on record. The issue involved in the present appeal relates to the addition of ₹49,43,366 made by the AO by treating the sundry creditors as unexplained credit u/s 68 of the Act, which has been confirmed by the Ld. CIT(A).
9.1 On perusal of the record, we note that the AO made the addition primarily on the ground that confirmations from certain creditors were not furnished, and in some cases, there were differences in balances. We further note that before the Ld. CIT(A), the assessee has filed detailed submissions explaining the nature of transactions, reconciliation of differences and furnished supporting documents such as ledger extracts, invoices and party-wise explanations in respect of each creditor. However, on careful reading of the order of the Ld. CIT(A), we find that the Ld. CIT(A) has confirmed the addition mainly by reiterating the legal position u/s 68 of the Act and the burden cast on the assessee.
The Ld. CIT(A) has not dealt with the specific explanations and evidence furnished by the assessee on party-wise basis. There is no finding recorded as to why the reconciliation furnished by the assessee is not acceptable or how the documents placed on record are insufficient. In our considered view, when the assessee has placed detailed materials on record explaining the sundry creditor balances, the same ought to have been examined and adjudicated on merits. The confirmation of addition without dealing with such submissions, in our view, is not in accordance with the principles of natural justice.
9.2 At the same time, we also note that the issue requires verification of facts such as identity of the creditors, genuineness of transactions and reconciliation of balances, which can be properly carried out only at the level of the AO. In view of the above facts and circumstances, we are of the considered opinion that the matter requires fresh examination. Accordingly, we set aside the order of the Ld. CIT(A) on this issue and restore the matter to the file of the AO with a direction to examine the issue afresh in accordance with law after considering the detailed submissions, evidence and reconciliation furnished by the assessee. The AO shall provide adequate opportunity of being heard to the assessee and decide the issue by passing a speaking order. Accordingly, this ground of appeal of the assessee is allowed for statistical purposes.
10. The next issue raised by the assessee is that the learned CIT(A) erred in confirming the disallowances of payment made to M/s Seaport Services Ltd under section 40(a)(ia) of the Act.
11. The AO found that the assessee during the year paid handling charges of Rs. 3,74,004/- to a party namely M/s Sea Port Services without deducting TDS. During the assessment, it was submitted that the provisions of TDS were not applicable to payment of the said party. However, the AO did not accept the assessee’s claim and held that the payment made to said party is in the nature of contract on which assessee was required to deduct TDS. But the assessee failed to do so. Hence, the AO disallowed the handling charges of Rs. 3,74,004/- by invoking the provisions of section 40(a)(ia) of the Act.
12. The aggrieved assessee preferred appeal before the learned CIT(A).
13. The assessee before the learned CIT(A) submitted that the AO wrongly treated the transaction with M/s Sea Port Services as payment made whereas amount was received from said party for services rendered to the said party. Therefore, the provision of TDS is not applicable on the transaction. Accordingly, the disallowances/addition made u/s 40(a)(ia) of the Act deserved to be deleted. However, the learned CIT(A) confirmed the disallowances made under section 40(a)(ia) of the Act by observing as under:
6.3 Ground 3.1 to 3.5 Under these grounds the appellant disputes the addition of Rs. 3,74,000/- u/s 40(a)(ia) of the act. The appellant submits that no such payment was made by him to M/s sea port services Ltd. which attracted provisions of section 194C and hence the provisions of section 40(a)(ia) are not applicable in the case.
In this regard it is observed from the assessment order that the appellant had claimed expenses towards the head handling charges in the name of some parties. One of the party in the list being sea port services against whom expenses to the tune of Rs. 3,74,004/- were claimed.
The appellant in it’s submission has claimed that he did not receive any service from the said entity. On the other hand the appellant is rendering services to M/s sea port services pvt. Ltd., Kolkata and issue bills to the said company. The appellant issued various bills and received a sum of Rs. 3,74,004/- from the said company in settlement of the bills. However, it is to be noted that the appellant has not submitted any evidence to verify it’s claim that he received services from the said entity and issued bills to him. Further, it is noted that the appellant has claimed handling expenses to the tune of Rs. 3,99,74,558/-but failed to explain the same during the appellate proceedings. It is the liability of the appellant to prove it’s claim that he received services from the M/s sea port services and issued bills to him and not the other way round as recorded by the AO. However, nothing has been placed on record to verify the same. In view of the above, the addition of Rs. 3,74,004/- made by the AO u/s 40(a)(ia) of the act cannot be allowed at this stage. The appeal is dismissed on this ground.
14. Being aggrieved by the order of the learned CIT(A) the assessee is in appeal before us.
15. The learned AR before us reiterated that the assessee has not incurred any expenditure payable of M/s Sea Port Services Pvt Ltd instead the assessee rendered services to the said party and received payment. Hence the provision of section 40(a)(ia) of the Act is not applicable.
15. On the contrary the learned DR before us supported the order of authorities below.
16. We have heard the rival contentions of both the parties and perused the materials available on record. The limited dispute before us is whether the sum of Rs. 3,74,004/- in the name of M/s Sea Port Services Pvt. Ltd. represents expenditure incurred by the assessee on which tax was deductible at source u/s 194C of the Act, thereby attracting disallowance u/s 40(a)(ia) of the Act, or whether, as contended by the assessee, the said amount was in fact a receipt for services rendered by him to the said party. The assessee has consistently taken the stand that he had not availed any services from M/s Sea Port Services Pvt. Ltd. and that he had on the contrary, rendered services to the said concern and received payment from it. From the orders of the lower authorities, we find that the AO proceeded on the footing that the assessee had claimed handling charges in the name of M/s Sea Port Services Pvt. Ltd. and since no tax was deducted, disallowance u/s 40(a)(ia) was called for. The Ld. CIT(A) also confirmed the addition mainly on the ground that the assessee did not furnish sufficient evidence to substantiate his claim that the transaction was one of receipt and not payment. Thus, the core issue, in our considered view, is factual in nature and requires proper verification of ledger accounts, bills raised, invoices, bank entries and the nature of the actual transaction between the assessee and M/s Sea Port Services Pvt. Ltd. In our opinion, if the assessee’s claim is correct and the amount in question represents income received by the assessee for services rendered by him, then the provisions of section 40(a)(ia) will have no application. Since that provision applies only where an assessee claims deduction for an expenditure on which tax was deductible but not deducted. At the same time, if on verification it is found that the assessee had in fact availed services from the said party and claimed the same as expenditure without complying with the TDS provisions, then the issue has to be decided in accordance with law. Since the relevant factual aspects have not been properly examined and the necessary supporting evidence has not been fully verified by the lower authorities, we deem it proper, in the interest of justice, to restore this issue to the file of the AO for fresh adjudication as per law. Accordingly, we set aside the impugned order of the Ld. CIT(A) on this issue and restore the matter to the file of the AO with a direction to verify the assessee’s claim that he had rendered services to M/s Sea Port Services Pvt. Ltd. and had received payment from the said concern, instead of availing services from it. If upon such verification the assessee’s claim is found to be correct, the AO shall delete the addition. If otherwise, the AO shall decide the issue afresh as per law. Needless to say, the AO shall provide adequate opportunity of being heard to the assessee and the assessee shall furnish all relevant documents in support of his claim. Hence, this ground of appeal is allowed for statistical purposes.
18. The last issue raised by the assessee in Ground No. 4 of the appeal pertain to disallowances of Bad Debt written off.
19. At the outset, we note that the learned AR before us submitted that the assessee is not willing to press this issue. Hence, we hereby dismiss the issue raised in this ground as not pressed.
20. In the result appeal of the assessee is hereby partly allowed for statistical purposes.
Order pronounced in court on 15th day of April, 2026
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