INCOME TAX OFFICER-41(3)(3), MUMBAI, MUMBAI vs. NAWALKISHOR BASUDEV SHARMA, MUMBAI

INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES, MUMBAI BENCH: B BEFORE SMT. BEENA PILLAI, HON’BLE JUDICIAL MEMBER AND MS. RATNA DASGUPTA, HON’BLE ACCOUNTANT MEMBER ITA 2120/MUM/2026 निर्धारण वर्ा/Assessment Year: 2022) INCOME TAX OFFICER- NAWALKISHOR BASUDEV 41(3)(3), MUMBAI SHARMA ROOM NO.853, 8TH FLOOR, SHOP NO 40A,1ST FLOOR KAUTILYA BHAVAN, BKC, G EXPRESS ZONE. NEXT TO BLOCK, BANDRA EAST Vs. PATEL VANIKA ,WESTERN MUMBAI-400051 EXPRESS HIGHWAY, MALAD MAHARASHTRA EAST, MUMBAI-400097 MAHARASHTRA अपीलधर्थी Appellant प्रत्यर्थी Respondent

Permanent Account Number of AMRPS0046B Assessee:

अपीलधर्थी द्वारा/Appellant represented by: Shree Kumar C. (SR DR) प्रत्यर्थी द्वारा/Respondent represented by: Shri J.P. Purohit, AR सुनवाई की तारीख / Date of conclusion of hearing: 18-Aug-2026 घोषणा की तारीख / Date of pronouncement: 31-08-2026 आदेश / ORDER PER SMT. BEENA PILLAI, JUDICIAL MEMBER: This appeal by the Revenue is directed against the order dated 08/12/2025 passed by the National Faceless Appeal Centre [“Ld. CIT(A)”] for A.Y. 2022-23. The Revenue has raised the following grounds of appeal:-

“1. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in deleting addition of Rs.6,00,70,268/- on account of the sundry creditors in view of the fact that the Assessee failed to submit ledger account, bills and vouchers during assessment proceedings.

ITA 2120/MUM/2026 NAWALKISHOR BASUDEV SHARMA 2. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in deleting addition of Rs.44,28,000/- on account of unsecured loan in absence of Assessee’s failure to submit the evidence of identity, creditworthiness and genuineness of the transaction at the time of assessment proceedings. 3. Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in not considering the fact that the addition was made on the basis of selection of case for scrutiny through CASS for the reasons that large turnover but books of accounts not audited u/s 44AB and High liabilities as compared to low income/receipts. 4. Whether on the fact and in the circumstances of the case, the Ld. CIT(A) erred in law in admitting and relying upon additional evidences filed by the assessee for the first time at the appellate stage without complying with the mandatory provisions of Rule 46A of the Income-tax Rules, 1962? 5. Whether the Ld. CIT(A) was justified in granting relief to the assessee on the basis of additional documentary evidences without affording an opportunity to the Assessing Officer to examine, verify, or rebut such evidences?” 2. Brief facts of the case are as under:

The assessee, an individual, is engaged in the business of export of granites, marbles, construction material and textile products under the name and style of M/s. L.N. Exports. The assessee filed the return of income for the year under consideration on 31/12/2022 declaring total income of Rs.22,73,190/-. The case was selected for scrutiny through CASS on account of large turnover without audit u/s 44AB and high liabilities as compared to income/receipts.

2.1. The Ld.AO completed the assessment u/s 143(3) r.w.s. 144B of the Act, on 08/03/2024, determining the total income at Rs.6,76,69,848/-. The following additions were made: Particulars Amount (Rs.) Sundry creditors treated as cessation of liability u/s 41(1) 6,00,70,268/- Brokerage expenses disallowed u/s 41(1) 8,98,390/- Unsecured loans added u/s 68 44,28,000/-

ITA 2120/MUM/2026 NAWALKISHOR BASUDEV SHARMA Particulars Amount (Rs.) Total additions 6,53,96,658/-

2.2. In respect of the sundry creditors, the Ld.AO required the assessee to furnish confirmations, bills and vouchers in respect of twelve creditors aggregating to Rs.6,00,70,268/-. As the requisite details were not furnished in response to the show-cause notice, the Ld.AO held the impugned liabilities to have ceased and made the addition u/s 41(1) of the Act. 2.3. In respect of unsecured loans aggregating to Rs.44,28,000/-, the Ld.AO required the assessee to furnish confirmations, returns of income, computation of income, capital accounts, balance sheets and bank statements of the loan creditors. Since the assessee did not furnish the requisite supporting documents, the Ld.AO added the loan amount u/s 68 of the Act. Aggrieved by the assessment order, the assessee preferred appeal before the Ld.CIT(A). 3. The assessee submitted creditor-wise details, confirmations, purchase details and bank statements reflecting payments made to the creditors in the succeeding financial year. It was submitted that the outstanding liabilities were primarily in respect of purchases made during the year and that substantial balances had been discharged during F.Y. 2022-23. 3.1. In respect of the unsecured loans, the assessee furnished confirmations, PAN particulars, returns of income and bank statements of the five loan creditors. It was submitted that the

ITA 2120/MUM/2026 NAWALKISHOR BASUDEV SHARMA identity and creditworthiness of the creditors, as well as the genuineness of the loan transactions, stood duly established.

3.2. The Ld.CIT(A), after considering the material placed on record, deleted the addition of Rs.6,00,70,268/- made u/s 41(1) and the addition of Rs.44,28,000/- made u/s 68 of the Act. The addition of Rs.8,98,390/- towards brokerage expenses was sustained. Aggrieved by the relief granted by the Ld. CIT(A), the Revenue is in appeal before us. We have perused the submissions advanced by both sides in light of the record placed before us. 4. The Ld.AO treated the outstanding trade creditors as cessation of liability merely because confirmations, bills and vouchers were not furnished in response to the show-cause notice. Before the Ld.CIT(A), the assessee furnished creditor-wise details, confirmations and bank statements demonstrating that substantial part of the outstanding balances had been discharged in the immediately succeeding financial year. The Ld.CIT(A) also recorded that the liabilities substantially related to purchases made during the relevant year. 4.1. Hon’ble Supreme Court in CIT v. Sugauli Sugar Works (P.) Ltd. reported in (1999) 236 ITR 518 held that section 41(1) is attracted only where the assessee obtained any benefit by way of remission or cessation of a trading liability. Mere continuance of an outstanding liability does not, by itself, establish remission or

ITA 2120/MUM/2026 NAWALKISHOR BASUDEV SHARMA cessation thereof. In the present case, the subsequent discharge of the creditor balances, supported by the payment details placed on record, negates the inference that the assessee obtained any benefit in respect of such liabilities during the relevant previous year. We, therefore, find no infirmity in the decision of the Ld. CIT(A) deleting the addition of Rs.6,00,70,268/-. 4.2. In respect of the addition of Rs.44,28,000/- made u/s 68 of the Act, the Ld.CIT(A) recorded that the assessee furnished confirmations, PAN particulars, returns of income and bank statements of the respective loan creditors. Thus, the assessee furnished documentary material in support of the identity of the creditors, their creditworthiness and the genuineness of the loan transactions. 4.3. Hon’ble Supreme Court in CIT v. Orissa Corporation (P.) Ltd. reported in (1986) 159 ITR 78 held that where the assessee furnishes the relevant particulars of the creditors and the Revenue does not bring material on record to disprove the explanation, the addition cannot be sustained merely on the basis of doubt. In the present case, the Revenue has not placed any material before us to controvert the factual finding of the Ld.CIT(A) based on the confirmations, income-tax particulars and bank statements of the loan creditors. We, therefore, do not find any reason to interfere with the deletion of the addition of Rs.44,28,000/-. 4.4. The Revenue has also challenged the admission of additional evidence by the Ld. CIT(A) without following the procedure prescribed under Rule 46A of the Income-tax Rules, 1962 (“the Rules”). In this regard, the Ld. DR filed written submissions dated

ITA 2120/MUM/2026 NAWALKISHOR BASUDEV SHARMA 21/08/2026, stating that the assessee had sought admission of additional evidence before the Ld. CIT(A) on the ground that the same could not be furnished before the Ld. AO due to medical reasons pertaining to the assessee’s wife. It was contended that the Ld. CIT(A) was bound to follow the procedure prescribed under Rule 46A before relying upon such evidence. 4.5. We have considered the aforesaid objection. It is not disputed that the assessee had explained before the Ld. CIT(A) that the relevant documents could not be furnished during the assessment proceedings on account of the medical condition of his wife. In our considered opinion, the explanation furnished by the assessee constituted a reasonable and sufficient cause for the inability to produce the documents before the Ld. AO. The additional evidence consisted of confirmations, ledger accounts, purchase particulars, subsequent payment details, returns of income and bank statements, all of which had a direct bearing on the additions made by the Ld. AO. 4.6. The powers of the Ld. CIT(A) are co-terminus with those of the Ld. AO. In terms of section 250(4) of the Act, the Ld. CIT(A) is empowered to make such further enquiry as deemed fit or to direct the Ld. AO to make further enquiry and report the result thereof. The Hon’ble Supreme Court in CIT v. Kanpur Coal Syndicate, reported in [1964] 53 ITR 225 (SC), held that the first appellate authority has plenary powers in disposing of an appeal and can do what the Ld. AO could have done as well as direct the Ld. AO to do what he had failed to do.

ITA 2120/MUM/2026 NAWALKISHOR BASUDEV SHARMA 4.7. The Hon’ble jurisdictional High Court in Smt. Prabhavati S. Shah v. CIT, reported in [1998] 231 ITR 1 (Bom.), held that the restrictions placed under Rule 46A are on the right of the assessee to produce additional evidence and do not curtail the powers of the first appellate authority u/s. 250(4) of the Act. Where the evidence is necessary for proper disposal of the appeal, the Ld. CIT(A) is duty-bound to consider the same in order to arrive at the correct conclusion. 4.8. In the present case, the Ld. AO made the additions primarily because the relevant documents could not be furnished during the assessment proceedings. The Ld. CIT(A), upon considering the explanation for such non-production and examining the documentary evidence, recorded categorical findings regarding the existence of the sundry creditors, subsequent discharge of the outstanding liabilities and the identity, creditworthiness and genuineness of the unsecured loan creditors. The evidence was therefore not extraneous to the issues under consideration but went to the very root of the additions. 4.9. The written submissions filed by the Ld.DR raise a procedural objection regarding Rule 46A. However, the Revenue has neither disputed the authenticity of the documents considered by the Ld.CIT(A) nor brought any material before us to controvert the factual findings recorded in the impugned order. The Revenue also did not demonstrate that the outstanding liabilities ceased during the year under consideration or that the confirmations, income-tax particulars and bank statements of the loan creditors were false or unreliable.

ITA 2120/MUM/2026 NAWALKISHOR BASUDEV SHARMA 5. The Ld.CIT(A), being the first appellate authority, exercises co- terminus powers with those of the Assessing Officer in relation to the subject matter of the appeal and is required to determine the correct tax liability on the basis of the material available before him. In the present case, the additional evidence furnished by the assessee was admitted after considering the circumstances in which such evidence could not be produced before the Assessing Officer. More importantly, the Ld.CIT(A) did not mechanically rely upon the additional evidence; he examined and verified the documents furnished by the assessee and thereafter recorded his findings on the merits of the additions.

5.1. We also find that, before us, the Revenue has not pointed out any specific defect, infirmity, or falsity in the documents so considered by the Ld.CIT(A), nor has it demonstrated how the examination of such material resulted in any prejudice to the Revenue. The sole objection raised by the Revenue is that the procedure contemplated under Rule 46A was not expressly followed/recorded in the impugned order. In these circumstances, the objection regarding Rule 46A, by itself, cannot be elevated to a ground for rejecting the substantive findings of the Ld.CIT(A), particularly when the material was before the appellate authority, was examined by him, and the additions have thereafter been adjudicated on merits.

5.2. The requirement of Rule 46A is intended to ensure procedural fairness and an effective opportunity to the Ld.AO. It is not intended to defeat an otherwise valid adjudication on merits where the appellate authority, in exercise of his co-terminus powers, has considered relevant material and the Revenue is unable to

ITA 2120/MUM/2026 NAWALKISHOR BASUDEV SHARMA demonstrate any prejudice caused by its consideration. The mere absence of a separate discussion under the heading of Rule 46A, without more, would therefore not render the order of the Ld.CIT(A) unsustainable, particularly when the Revenue has not identified any specific prejudice or material infirmity arising from consideration of the additional evidence. The objection of the Revenue on this count is, accordingly, not sufficient to dislodge the findings recorded by the Ld.CIT(A) on merits.

5.3. We further note that the addition of Rs.6,00,70,268/- was made u/s. 41(1) merely because confirmations, bills and vouchers were not furnished before the Ld.AO. Even in the absence of the additional evidence, mere non-furnishing of confirmations does not establish remission or cessation of a trading liability. The Revenue was required to establish that the assessee obtained benefit by way of remission or cessation during the relevant previous year. No such material was brought on record by the Ld.AO. The subsequent payment details considered by the Ld.CIT(A) only reinforced the subsisting nature of the liabilities.

5.4. Similarly, in respect of the unsecured loans aggregating to Rs.44,28,000/-, the Ld.CIT(A) recorded a factual finding that the assessee had furnished confirmations from the respective creditors, their PAN particulars, returns of income and bank statements. The aforesaid documents furnished the relevant material for examining the three ingredients contemplated under section 68 of the Act, namely, identity of the creditors, their creditworthiness and genuineness of the transactions. Upon examination of the said material, the Ld.CIT(A) accepted the explanation furnished by the assessee and deleted the addition.

ITA 2120/MUM/2026 NAWALKISHOR BASUDEV SHARMA Before us, the Revenue has neither pointed out any specific infirmity in the aforesaid documents nor brought on record any material to controvert the factual findings recorded by the Ld.CIT(A). No adverse material has also been placed before us to establish that the transactions were non-genuine or that the creditors lacked the financial capacity to advance the loans.

5.5. We have already observed that the Ld.CIT(A), being the first appellate authority, has co-terminus powers with the Assessing Officer in relation to the subject matter of the appeal. The additional evidence was considered by him and the documents furnished by the assessee were examined while adjudicating the additions on merits. In such circumstances, the object of Rule 46A, namely, to ensure fairness and an effective opportunity to the Assessing Officer in respect of additional evidence, cannot be divorced from the question of prejudice. In the peculiar facts of the present case, the Revenue has not demonstrated before us any specific prejudice caused by consideration of the additional evidence, nor has it controverted the evidentiary material on merits.

5.6. We are conscious that compliance with Rule 46A cannot ordinarily be treated as a mere formality. However, the present case cannot be decided merely on the basis of the absence of a separately recorded finding under each clause of Rule 46A. The material in question before the appellate authority, was examined by him, and formed the basis of findings rendered on merits. More importantly, even before us, the Revenue has not identified any specific defect in the documents relied by the Ld.CIT(A), nor has it placed any contrary material on record. In these circumstances, a

ITA 2120/MUM/2026 NAWALKISHOR BASUDEV SHARMA remand solely to enable the Revenue to raise a procedural objection, in the absence of demonstrated prejudice and without any challenge to the evidentiary material on merits, would serve no meaningful purpose and would only prolong the litigation.

5.7. The CASS parameters merely constitute a basis for selection of the assessee's case for scrutiny. Such parameters may define the scope or reason for undertaking scrutiny, but they do not, by themselves, establish the existence of taxable income or justify an addition. Any addition must independently satisfy the conditions prescribed under the relevant statutory provision and must be supported by material brought on record during the assessment proceedings. In the present case, the Revenue has not demonstrated how the mere selection of the case under the CASS parameters could sustain the additions in the absence of the requisite statutory conditions being established.

5.8. In view of the foregoing discussion, we find no merit in the Revenue's objection concerning the admission and consideration of the additional evidence. The findings recorded by the Ld.CIT(A) are based upon the material available on record and have not been shown to be factually or legally incorrect. The Ld.DR’s challenge on this count thus stands, rejected.

Accordingly, Ground Nos.3-5 raised by the Revenue stands dismissed.

ITA 2120/MUM/2026 NAWALKISHOR BASUDEV SHARMA Rs.44,28,000/- made under section 68 of the Act, as the Revenue has failed to demonstrate any error therein warranting interference by this Tribunal.

Accordingly, Ground Nos.1-2 raised by the Revenue stands dismissed.

In the result, appeal filed by the Revenue is dismissed.

Order pronounced in the open court on 31-08-2026. Sd/- Sd/- RATNA DASGUPTA BEENA PILLAI ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai Dated: 31-08-2026 SC, Sr. P.S.

ITA 2120/MUM/2026 NAWALKISHOR BASUDEV SHARMA Copy to: INCOME TAX OFFICER-41(3)(3), MUMBAI, ROOM NO.853, 8TH FLOOR, KAUTILYA 1 BHAVAN, BKC, G BLOCK, BANDRA EAST, MUMBAI-400051, MUMBAI-400051, MAHARASHTRA NAWALKISHOR BASUDEV SHARMA, SHOP NO 40A,1ST FLOOR EXPRESS ZONE. NEXT TO PATEL VANIKA 2 ,WESTERN EXPRESS HIGHWAY, MALAD EAST, MUMBAI-400097, MUMBAI-400097, MAHARASHTRA 3 THE PCIT / CIT, 4 THE D.R., ITAT, MUMBAI BENCH 5 GUARD FILE TRUE COPY

ASSISTANT REGISTRAR / SR. PRIVATE SECRETARY I.T.A.T., MUMBAI