SANGAM JEWELLER,MADURAI vs. ITO, NCC-1, MADURAI

The assessee is a partnership firm engaged in the business manufacturer of gold jewellery and sale of bullion and gold jewellery. The assessee filed a return of income for AY 2018-19 on 19.09.2018 declaring total income of Rs.22,04,300/-. The A.O during the course of assessment noticed that the assessee has introduced new unsecured loans in the business amounting to Rs.1,98,28,613/- from various loan creditors. The AO further noticed that in the earlier AY the assessee has not shown any unsecured loans in the audited balance sheet. The assessee in response submitted copies of ledger confirmations and the ITRs of the loan creditors, the wealth tax returns etc. The assessee also submitted that the loan creditors are not new loans received during the year under consideration and that the assessee had inadvertently shown the loan creditors as sundry creditors in the financial statements for AY 2017-18. Accordingly, the assessee submitted that no new loans have been borrowed during the year under consideration. The A.O however did not accept the submissions of the assessee and proceeded to treat the entire balance of the unsecured loans as addition u/s. 68 of the Act. The relevant findings of the A.O are extracted herein below:

From the above submission, it is seen that the assessee is changing its stand as per convenience when it does not have any reply to sundry creditors mentioned in an audited balance sheet for A.Y.2017-18. Moreover, mere filing of WTRs by the loan creditors does not prove the genuineness of the source of acquisition of gold. It appears that all the supporting documents are accumulated by the assessee firm and its partners as an afterthought or in consequence to notices issued by the department. Also, the nature in which the heads of an audited balance sheet has been changed from sundry creditors to unsecured loans in A.Ys. 2017-18 and 2018-19 appears to be very manipulative. Thus it is clear that the unsecured loans are new loans for the year under consideration ie. A.Y.2018-19 which remains unexplained.

It would also be not out of place to mention here that the firm has claimed to have paid interest on unsecured loan totalling to Rs. 2147504/- and has deducted TDS of Rs.214751/- on such interest payments. However assessee has not enclosed any proof/evidence of TDS paid to government nor has furnished any TDS statements in support.

Vide show cause notice dated 27.03.2021, incorporating Draft Assessment Order, assessee was requested to file submissions on or before 30.03.2021. However, vide response letter dated 03.04.2021 assessee has stated that the purchases were genuine as supported by VAT payments and VAT return.

In view of the above facts and circumstances, it can be seen that assessee could not substantiate the new loans introduced during the A.Y. 2018-19 and intermittently changed its stand by saying it was gold loan without any corroborative and cogent evidences. It is clear that the assessee has made last ditch efforts to gather false evidences which are unverifiable. Hence the unsecured loans remained unexplained. Accordingly the same are added back to the total income of assessee.”

The CIT(A) confirmed the addition stating that: “5.3 Aggrieved with the above said addition, the appellant is in appeal raising grounds as mentioned at para 3.

The Ld. Authorized Representative (AR) of the assessee submitted that the assessee has not borrowed any new loans during the year under consideration and therefore no addition could be made u/s. 68 of the Act. The Ld. AR further submitted that in the financial statements pertaining to AY 2017-18, the assessee has inadvertently reflected the loan creditors as sundry creditors and drew our attention to the financial statements in this regard:

The Ld. AR also submitted that the assessee has corrected the said error in the subsequent year (page 59 & 65 of paper book). The Ld. AR submitted that the increase in the outstanding balance is only due to the interest payments on which the assessee has deducted tax at source. The Ld. AR further submitted that the impugned loans are gold loans taken during the previous financial year and that the assessee has submitted the purchase invoices, ledger confirmations, the copies of ITRs and wealth tax returns which have not been properly appreciated by the lower authorities.

The Ld. Departmental Representative (DR), on the other hand, submitted that the assessee has initially submitted before the AO that the outstanding balances pertain to purchase of gold jewellery from the impugned parties and submitted purchase invoices, VAT returns etc. The ld DR further submitted that subsequently the assessee has changed its stand stating that the outstanding balances pertain to unsecured loans with regard gold loans. The Ld. DR further argued that the assessee has not discharge the onus proving the genuineness of the transactions and therefore the lower authorities are rightly made the addition.

We have carefully considered the rival submissions and perused the material available on record. In the present case the addition under section 68 has been made on the premise that the assessee has reflected unsecured loans amounting to Rs.1,98,28,613/- in the balance sheet for the year under consideration, whereas no unsecured loans were disclosed in the audited balance sheet of the immediately preceding assessment year. According to the revenue, the unsecured loans were introduced during the relevant previous year and the assessee failed to satisfactorily explain the nature and source thereof. We notice that the consistent stand of the assessee is that the impugned amount does not represent fresh borrowings received during the previous year relevant to the assessment year under consideration. It is the case of the assessee that the assessee has borrowed loans in the form of Gold from the impugned parties which has been inadvertently reflected as sundry creditors in the financials of the immediately preceding year and that the said outstanding liabilities were subsequently reflected correctly as loan liabilities for the year under consideration. We further notice that the assessee has produced purchase invoices pertaining to the earlier year, ledger accounts of the respective parties, confirmations and other supporting documents. It has further been contended that the entire loan pertains to the earlier financial year and the increase in the outstanding balances during the year under consideration is only on account of interest credited to the respective accounts, on which tax has been deducted at source.

It is a settled position that addition under section 68 can be made only in respect of a sum found credited in the books of the assessee during the relevant previous year. Therefore, before invoking the said provision, it is incumbent upon the A.O. to examine whether the impugned amount represents a fresh credit recorded during the previous year relevant to the assessment year under consideration or merely an existing liability carried forward from the earlier year under a different accounting classification. A mere change in the nomenclature of an existing liability, without there being any fresh credit in the books during the relevant previous year, would not by itself attract the provisions of section 68. We notice that the A.O. in assessee's case has doubted the genuineness of the purchase invoices on the ground that they bear the same date and has also expressed reservations regarding the confirmations, income-tax returns and wealth-tax returns of the creditors. The CIT(A), while affirming the addition, has also observed that the assessee had taken inconsistent stands during the assessment proceedings and that the claim regarding deduction of tax at source on the interest credited was not substantiated by the relevant TDS statements. However, neither the A.O. nor the CIT(A) has undertaken any verification of the books of account, ledger accounts, purchase transactions, accounting entries relating to the alleged loan liabilities or the claim that the increase in the outstanding balances represents only interest credited during the year. In our considered view, these are foundational facts which have a direct bearing on the applicability of section 68 itself and cannot be decided merely on the basis of the nomenclature adopted in the financial statements or by entertaining doubts regarding the evidences without carrying out the necessary verification. Accordingly we are of the view that the issue requires a fresh examination and therefore we restore the issue back to the file of the A.O. for fresh adjudication in accordance with law. The A.O. is directed to verify the books of account, purchase invoices relating to the earlier year, ledger accounts of the respective parties, the accounting entries evidencing the conversion of the trade liabilities into loan liabilities, the claim regarding interest credited during the year together with the corresponding TDS compliances and thereafter determine whether any fresh credit has been recorded in the books during the previous year relevant to the assessment year under consideration so as to attract the provisions of Section 68 of the Act. The assessee is directed to furnish all supporting evidences in support of its claim.

In the result, the appeal of the assessee is allowed for statistical purposes. Order pronounced on 07th day of August, 2026 at Chennai.