ASSISTANT COMMISSIONER OF INCOME TAX, VELLORE vs. MANJU TRANSPORT, TIRUVANNAMALAI

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ITA 3900/CHNY/2025Status: DisposedITAT Chennai04 June 2026AY 2022-2314 pages
AI SummaryPartly Allowed

What did the Tribunal hold?

The Tribunal held that the ingredients for invoking Section 69 were not satisfied and directed the deletion of the addition of Rs. 27,49,22,566/-. The Tribunal also found no illegality in the CIT(A)'s deletion of the addition made under Section 40A(3).

What were the facts?

The assessee firm engaged in freight transport had additions made by the AO on account of sundry creditors, unexplained investment in debtors, and disallowance under Section 40A(3). The CIT(A) deleted the additions related to sundry creditors and Section 40A(3) but confirmed the addition for unexplained investment.

What were the issues?

Whether the addition for unexplained investment under Section 69 was justified, and whether the disallowance under Section 40A(3) was correctly made.

Which sections of the Income-tax Act were involved?

Section 41(1),Section 40A(3),Section 69

AI-generated summary — verify with the full judgment below

Income Tax Appellate Tribunal, ‘B’ BENCH, CHENNAI

Before: SHRI INTURI RAMA RAO & SHRI MANU KUMAR GIRI

For Respondent: Shri Shiva Srinivas, CIT
Hearing: 06.05.2026Pronounced: 04.06.2026

आदेश/ O R D E R PER BENCH: These are cross appeals filed by the assessee as well as the Revenue directed against the order of the Learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi (in short ‘CIT(A)’) dated 14.10.2025 for the assessment year 2022-23.

2.

Brief facts of the case are that the appellant is a partnership firm engaged in the business of freight transport. The return of income for the assessment year 2022-23 was filed by the appellant on 29.11.2022 disclosing income of Rs.2,85,61,735/-. Against the said return of income, assessment was completed by e-Assessment Unit of the Department (hereinafter the ‘AO’) vide order dated 22.03.2024 passed u/s.143(3) r.w.s.144B of the Income Tax Act, 1961 (hereinafter the ‘Act’) at a total income of R.s35,71,43,877/-. While doing so, the AO made addition of Rs.2,33,96,714/- on account of sundry creditors outstanding by holding that there was a cessation of liability invoking the provision of section 41(1)(A) of the Act. The AO also made addition of Rs.27,49,22,566/- being the amount

ITA Nos.3132 & 3900/Chny/2025 :- 3 -: shown as outstanding debtors in the name of Promise Economics Pvt. Ltd., as unexplained investment. The AO also made addition of Rs.3,02,62,862/- u/s.40A(3) of the Act.

3.

Being aggrieved by the above assessment order, the appellant filed an appeal before the CIT(A) contending that there is no cessation of liability on account of sundry creditors of Rs.2,33,96,714/- under the provisions of section 41(1) of the Act for non-application. The CIT(A) accepted the contention of the appellant, directed the AO to delete the addition of Rs.2,33,96,714/-. The appellant also contended that the adhoc disallowance u/s.40A(3) of the Act made without identifying specific cash payments which are made in contravention of provisions of section 40A(3) of the Act. The CIT(A) accepted the contention of the assessee firm and directed the AO to delete the addition made u/s.40A(3) of the Act. As regards the unexplained investment u/s.69 of the Act, the CIT(A) confirmed the addition of the AO.

4.

Being aggrieved by that part of the order of CIT(A) which is against the assessee firm, the assessee is in appeal in ITA No.3132/CHNY/2025. Being aggrieved by that part of the order

ITA Nos.3132 & 3900/Chny/2025 :- 4 -: of CIT(A) which is against the interests of Revenue, the Revenue is in appeal in ITA No.3900/CHNY/2025.

ITA No.3132/CHNY/2025 5. Now we shall take up assessee’s appeal. The assessee raised the following grounds of appeal:- 1) The order of the Ld. CIT(Appeals) is erroneous on the facts of the case and contrary to the provisions of law.

2) On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in upholding the addition of Rs.27,49,22,566/- made u/s 69 of the Act towards unexplained investment in respect of the sundry debtor shown in the name of M/s Promise Economics Pvt Ltd in the books of account.

3) The Ld. CIT(A) grossly erred in law in treating the amount recorded in the books of account as unexplained investment u/s 69 of the Act, though it is a mandatory condition for invoking the provisions of section 69 that the relevant investment is not recorded in the books of account.

4) On the facts and circumstances of the case and in law, the Ld. CIT(Appeals) erred in sustaining the addition made u/s 69 of the Act though the AO has not discharged the burden cast on him to establish that the pre-requisite conditions for invoking the said provisions are satisfied in the facts of the case.

5) On the facts and circumstances of the case and in law, the Ld. CIT(Appeals) erred in sustaining the addition made by the Assessing officer u/s 69 of the Act, which is based on wholly incorrect appreciation of facts and extraneous reasons.

6) On the facts and circumstances of the case, the Ld. CIT(A) ought to have appreciated that the debit balance in the account of M/s Arnica Enterprises Pvt Ltd which arose due to the transport services rendered to it by the appellant during the course of the business was transferred to the

ITA Nos.3132 & 3900/Chny/2025 :- 5 -: account of M/s Promise Economics Pvt Ltd through a journal entry in the books of the appellant as M/s Arnica Enterprises Pvt Ltd requested M/s Promise Economics Pvt Ltd to make the payment to the appellant on its behalf, out of the loan dues payable by M/s Promise Economics Pvt Ltd to M/s Arnica Enterprises Pvt Ltd.

7) On the facts and circumstances of the case and in law, the Ld. CIT(Appeals) erred in sustaining the addition made by the Assessing officer u/s 69 of the Act, which is based solely on surmises and conjectures

8) Any other legal or factual grounds that may be urged at the time of hearing of the appeal.

6.

The factual background leading to the above addition by AO is as under. During the course of assessment proceedings, the assessee firm was called upon to explain the nature of the transaction it had with one firm namely Promise Economics Pvt. Ltd., in whose name the amount was shown outstanding to the assessee as on 31.03.2022 of Rs.27,49,22,566/-. In response to the query, the assessee firm made submission that Promise Economics Pvt. Ltd., during the previous year relevant to the assessment year under consideration, the assessee firm made payment of Rs.27,49,22,566/- to Promise Economics Pvt. Ltd., through Arnica Enterprises Pvt. Ltd. The same is shown as outstanding debtors in the books of accounts maintained by the assessee firm. The AO is of the opinion that since no sales were made to the said Promise Economics Pvt. Ltd., nor any actual

ITA Nos.3132 & 3900/Chny/2025 :- 6 -: payment was made, there was no justification in showing the said party as outstanding debtor of an amount of Rs.27,49,22,566/-. Accordingly, the AO drew adverse inference that it has unexplained investment. Accordingly, made addition of Rs.27,49,22,29,566/-. Even on appeal before the CIT(A), the CIT(A) confirmed the action of the AO.

7.

Being aggrieved, assessee is in appeal before us. The Ld.AR contends that the assessee was a sub-contractor to Arnica Enterprises Pvt. Ltd., (hereinafter ‘AEPL’) and an amount of Rs.27,49,22,566/- was due from said company. The assessee addressed a letter to the said company on 23.08.2021 demanding the payment of outstanding dues. Subsequently, Arnica Enterprises Pvt. Ltd., addressed a letter to Promise Economics Pvt. Ltd., on 24.08.2021 making a copy to the assessee requesting Promise Economics Pvt. Ltd., (hereinafter ‘PEPL’) to make payment of Rs.27,49,22,566/- to the assessee on its behalf out of the outstanding loan payable by PEPL to AEPL. Subsequently PEPL addressed a letter to AEPL on 26.08.2021 promising to pay the amount of Rs.27,49,22,566/- to the assessee firm on behalf of AEPL. It is submitted that except this transaction, the assessee firm had no other dealings with

ITA Nos.3132 & 3900/Chny/2025 :- 7 -: PEPL. However, no payment was received from the PEPL till 31.03.2022 and the same was shown as debtors in the books of accounts of the assessee. The AO drew adverse inference based on the fact that on verification of the bank account of the assessee, no such payment was received from PEPL till 31.03.2022. The appellant had inadvertently mentioned in reply to the questionnaire furnished on 16.03.2024 to the show cause notice dated 14.03.2024 issued by that AO that it has received payment from PEPL for the services provided to AEPL. It is further submitted that in terms of the letter written by PEPL agreeing to make payment to the assessee firm on behalf of the AEPL on account of understanding reached between them, the payment is due from PEPL and therefore, shown as sundry debtors in the books of account of the assessee firm instead of AEPL by passing necessary journal entries in the books of the assessee firm. He submitted that the lower authorities in the total disregard of the explanation offered by the assessee had erroneously sustained the addition u/s.69 of the Act. It is further submitted that AEPL is one of the principal contractors who had awarded sub-contract to the assessee firm. The gross business contract receipts of the assessee firm for the year under consideration is Rs.54,86,49,467/-, out of which an amount of

ITA Nos.3132 & 3900/Chny/2025 :- 8 -: Rs.27,49,22,566/- was outstanding as on 31.03.2022. He further submitted that the amount outstanding in the name of PEPL is nothing but a debt which is receivable against the contract receipts credited to P&L account and it cannot be treated as unexplained investment and the same was recorded in the books of accounts maintained by the assessee firm and assessee firm offered an explanation in support of the source of investment. In this regard, reliance is placed on the judgment of Hon’ble Bombay High Court in the case of Babulal C Borana vs. Third Income Tax Officer, [2005] 144 Taxman 674 (Bom) and the Hon’ble Calcutta High Court in the case of Pr.CIT vs. Inland Road Transport Ltd., [2002] 137 taxmann.com 469.

8.

On the other hand, the Ld.Senior DR submits no justification was provided by the assessee for showing the PEPL as an outstanding debtor in the books of accounts maintained by the assessee firm and therefore, the CIT(A) rightly made an addition u/s.69 of the Act.

9.

We heard rival submissions and perused the material on record. The issue that arise for our consideration is whether the CIT(A) was justified in confirming the addition of

ITA Nos.3132 & 3900/Chny/2025 :- 9 -: Rs.27,49,22,566/- as unexplained investment u/s.69 of the Act. The AO made addition of Rs.27,49,22,566/- being the outstanding debtors standing in the name of PEPL in the books of accounts maintained by the assessee firm. When the assessee firm was called upon to explain the nature of entry, the assessee firm made detailed submissions during the course of assessment proceedings that the said outstanding debtors represents the amount due to the assessee firm from AEPL on account of sub- contracts executed on behalf of the said firm. On instructions from AEPL, PEPL undertook to pay the amount to the assessee firm based on the undertaking given by the PEPL vide its letter dated 25.08.2021, the assessee firm made journal entry in the books of accounts maintained by it showing PEPL as a debtor in the place of AEPL. These submissions made by the assessee firm were not found to be false by the AO. It appears that the AO merely swayed by the fact that on verification of the bank account of the assessee firm, it was found that no payment was received by the assessee from PEPL. Subsequently, it was clarified that no payment was received, however the outstanding amount was shown as receivable from PEPL instead of AEPL. The AO also not doubted that the assessee firm had executed contracts on behalf of AEPL on account of which AEPL owes a

ITA Nos.3132 & 3900/Chny/2025 :- 10 -: sum of Rs.27,49,22,566/-. The AO also not doubted the correspondences between the AEPL versus PEPL whereby, AEPL had given instructions to pay out of the outstanding loan amount to PEPL, a sum of Rs.27,49,22,566/- to the assessee firm. Based on these correspondences, the assessee firm had passed a journal entry nullifying the amount due from AEPL and showing the PEPL as outstanding debtor in the books of accounts maintained by the assessee firm. These facts clearly narrates that there was no cash outflow out of the coffer of the assessee firm nor it can lead to a conclusion that the assessee firm had made investment which are not recorded in the books of accounts attracting the provisions of section 69 of the Act nor it can be treated as unexplained investment or money of the assessee firm. On identical case, the Hon’ble Madras High Court in the case of CIT vs. Smt. V. Prema reported in [2007] 292 ITR 151 (Mad) held as under:- “Though the Judicial Member referred to section 69A of the Act, the question revolves on section 69 of the Act and hence, before going further, it is apt to refer section 69 of the Act:

"69.Unexplained Investments:

Wherein in the financial year immediately preceding the assessment year the assessee has made investments which are not recorded in the books of account, if any, maintained by him for any source of income, and the assessee offers no explanation about the nature and source of the investments or the explanation offered by him is not, in

ITA Nos.3132 & 3900/Chny/2025 :- 11 -: the opinion of the Assessing Officer, satisfactory, the value of the investments may be deemed to be the income of the assessee of such financial year.”

A reading of the above section goes to show that the assessing officer may treat the value of investment as income only when the explanation offered by the assessee is not satisfactory. The Tribunal has rendered a finding that there was no material for the assessing authority to conclude that the exact quantity of missing jewellery had been acquired at a subsequent date. As observed by the Gujarat High Court in Ushakant N.Pate v. C.I.T (282 ITR 553), the Revenue must establish that there was investment not recorded in books of account and that such investment was made in the relevant financial year. The Gujarat High Court also held that in the first instance it is incumbent upon the authority to establish that there were investments made by the assessee. In the instant case, the Tribunal has rendered a finding of fact that there was no material to show that the assessee again purchased the same quantum of jewellery and that there was no material to show that even though the assessee mechanically returned the jewellery in her wealth-tax return, such excess jewellery was found in her possession to the extent declared and the addition was based on the presumption of the department. Further, in the order in W.T.A.No.326/Mds/91 dated 14.12.2004 which arose out of wealth-tax assessment of the assessee for the assessment year 1988-89, the Tribunal rendered a finding that there was no material to show that the assessee again purchased the same quantum of jewellery and as no appeal had been preferred against the said order dated 14.12.2004, the same had become final.

We are therefore of the view that when the Tribunal has rendered a finding of fact that there is no material to show that the assessee had again purchased the jewellery, it is not open to the Court to disturb the same as, when the Tribunal based its findings on facts, no question of law much less a substantial question of law arises for consideration (vide: C.I.T. v. P.V.Bhoopathy (283 ITR 0365).”

10.

The ingredients necessary for invoking the provisions of section 69 of the Act are not satisfied. Therefore, the CIT(A) had clearly fell in serious error in sustaining the addition made by the

ITA Nos.3132 & 3900/Chny/2025 :- 12 -: AO u/s.69 of the Act. Hence, we direct the AO to delete the addition of Rs.27,49,22,566/-. Accordingly, the appeal filed by the assessee stands allowed.

ITA No.3900/CHNY/2025 11. The Revenue has raised the following grounds of appeal:- 1. The order of the ld CIT(A) is contrary to law and facts and circumstances of the case.

2 The ld CIT(A) erred in deleting the disallowance of Rs.2,81,02,863/- u/s 40A(3) of the Act made by the Assessing Officer, holding that the same is based on assumption / surmises, without any enquiry, which cannot be the basis for disallowance u/s 40A(3) of the Act.

3 The ld CIT(A) ought to have noted that assessee did not produce any documentary evidence during the assessment proceedings to demonstrate that the cash payments were within the monetary limits prescribed under Sec.40A(3) or payments fell within any of the exceptions provided under Rule 6DD of the IT Rules, 1962, even though the burden of proof is on the assessee to substantiate that there is no disallowance u/s 40A(3) is called for, by providing essential books / documents before the Assessing Officer, especially when tax audit report does not mention findings about verification on this disallowance and only the Assessing Officer noticed and questioned the assessee on this issue.

4.

The ld CIT(A) failed to note that the assessee had merely submitted cash withdrawal and utilization statement, before the Assessing Officer, providing details of cash withdrawn from bank and utilized for different expenses. No detailed accounts such as vouchers, day-wise payment records, payee details, evidence of business exigency or banking constraints etc., have been provided by assessee to discharge his burden of proof, which details are crucial to verify each and every item of expenditure to decide on applicability of disallowance u/s 40A(3).

ITA Nos.3132 & 3900/Chny/2025 :- 13 -: 5. For these and other grounds that may be adduced at the time of hearing, it is prayed that the order of the Appellate Authority, i.e., NFAC, Delhi, may be set aside and that of the Assessing Officer restored.

12.

The Revenue filed this appeal challenging the correctness of the findings of the CIT(A) deleting the addition made u/s.40A(3) of the Act. The CIT(A) deleted the addition made by the AO u/s.40A(3) of the Act accepting the contention of the assessee firm that no disallowance u/s.40A(3) of the Act can be made on adhoc basis on presumptive basis at 20% of the expenses paid. On mere reading of the assessment order, para 4.5(iv) which is very clear that the AO made adhoc disallowance of 20% of the total expenditure of Rs.14,05,14,313/- invoking the provisions of section 40A(3) of the Act. While invoking the provisions of section 40A(3) of the Act, it is incumbent upon the AO to specifically bring on record the instances of violations of section 40A(3) of the Act, which the AO had failed to do so. Therefore, the CIT(A) rightly deleted the addition. We do not find any illegality or infirmity in the order of the CIT(A) deleting the addition u/s.40A(3) of the Act. Also, we do not find any merit in the grounds of appeal filed by the Revenue. Accordingly, the appeal filed by the Revenue stands dismissed.

ITA Nos.3132 & 3900/Chny/2025 :- 14 -: 13. In the result, the appeal filed by the assessee in ITA No.3132/CHNY/2025 is allowed and the appeal filed by the Revenue in ITA No.3900/CHNY/2025 is dismissed.

Order pronounced in the open court on 4th June, 2026 at Chennai.

Sd/- Sd/- (मनु कुमार �ग�र) (इंटूर� रामा राव) (MANU KUMAR GIRI) (INTURI RAMA RAO) �या�यक सद�य/JUDICIAL MEMBER लेखा सद�य/ACCOUNTANT MEMBER चे�ई/Chennai, �दनांक/Dated, the 4th June, 2026 RSR, Sr.PS

आदेश क� ��त�ल�प अ�े�षत/Copy to: 1. िनधा�रती /Assessee 2. राज� /Revenue 3. आयकर आयु�त /CIT, Chennai 4. �वभागीय ��त�न�ध/DR 5. गाड� फाईल/GF. By Order Digitally signed by REKHA REKHA SENTHIL RAJ SENTHIL RAJ Date: 2026.06.08 16:00:24 +05'30'

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