DCIT, CIRCLE, GORAKHPUR, GORAKHPUR vs. KSHETRIYA SHRI GANDHI ASHRAM, DEORIYA

IN THE INCOME TAX APPELLATE TRIBUNAL VARANASI BENCH, VARANASI BEFORE SH. SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER AND SH. NIKHIL CHOUDHARY, ACCOUNTANT MEMBER ITA No.13/VNS/2025 A.Y. 2018-19 DCIT, vs. Kshetriya Shri Gandhi Ashram, Circle, Gorakhpur Purani Jail, Rakhpur Road, Deoriya PAN: AAATK9934D (Appellant) (Respondent) Assessee by: Sh. Parasaran, Advocate Revenue by: Sh. Amalendu Nath Mishra, CIT DR Date of hearing: 04.08.2026 Date of pronouncement: 31.08.2026

O R D E R PER NIKHIL CHOUDHARY, AM: This appeal has been filed by the Department against the orders of the ld. CIT(A), NFAC dated 25.11.2024, wherein the ld. CIT(A) has partly allowed the appeal of the assessee against the assessment framed under section 147 r.w.s. 144B of the Income Tax Act, dated 20.03.2023 for the assessment year 2018-19. The grounds of appeal are as under: - “1. On the facts and in the circumstances of the case and in law, the Ld. Commissioner of Income Tax (Appeals), NFAC has erred in deleting the addition of Rs. 8,53,74,436/- made u/s 68 of the Act on account of sundry creditors without appreciating the facts that the assessee failed to justify the sundry creditors during both assessment as well as appellate proceedings. 2. On the facts and in the circumstances of the case and in law, the Ld. Commissioner of Income Tax (Appeals), NFAC has erred in Partly-deleting the Dis-allowance of business expenditure to the extent of Rs. 2,53,20,605/- (80% of total expenditure of Rs. 3,16,50,756/-) made u/s 37(1) of the Act without appreciating the facts that the assessee failed to justify such expenditure during both assessment as well as appellate proceedings."

ITA No. 13/VNS/2025 Kshetriya Shri Gandhi Ashram 2. The facts of the case are that the ld. Assessing Officer noted that the assessee trust had cash deposits in Punjab National Bank amounting to Rs. 1,44,82,000/- and in Allahabad Bank of Rs. 46,31,500/- but had not filed a return of income. From this he came to a conclusion that income of Rs. 1,91,13,500/- had escaped assessment for the relevant assessment year. A number of notices were issued to the assessee during assessment proceedings but except for making compliance to two notices, it did not make compliance to the remaining notices. The ld. Assessing Officer noted that before him, it was submitted that the assessee was functioning as an AOP and was a registered unit under the Khadi and Village Industries Commission of India to promote Khadi, Village Industry Products like handloom made cotton lint, cotton, silk, fabric, readymade, khadi products, honey and so on. Most of the products had been sold in cash thorugh the various units and centers of the Ashram and accounts were appropriately maintained and accounted for on daily basis. The financial statements were prepared at the center and bhandar level which were consolidated into a unified balance-sheet, which was also subjected to statutory audit and tax audit by an independent auditor. It had been submitted that the Gandhi Ashram had a turnover of Rs. 6,32,81,707/- during F.Y. 2017-18 which was exempt under section 10(23B) of the Income Tax Act. Accordingly, the assessee had prayed before the ld. Assessing Officer, that the assessment proceedings may kindly be dropped. However, the ld. Assessing Officer noted that there were huge number of sundry creditors amounting to Rs. 8,53,74,736/- and large amount of direct expenditure amounting to Rs. 3,16,50,756/- on which information was required, as also information in support of claim under section 10(23B). However, in spite of opportunities, the assessee had failed to furnish this information before him. Accordingly, the ld. Assessing Officer treated the cash deposits of Rs. 1,99,64,300/- as

ITA No. 13/VNS/2025 Kshetriya Shri Gandhi Ashram unexplained under section 68. He also held that the sundry creditors amounting to Rs. 8,53,74,436/- were unverified and therefore, he added the same back under section 68 of the Act. The ld. Assessing Officer also noted that assessee had made payments towards audit fee, interest paid to others and rent paid details but not deducted any tax on the same and therefore, he made a disallowance of Rs. 8,13,043/- under section 40(a)(ia). Finally because the assessee did not make any submissions with regard to direct expenditure of Rs. 3,16,50,756/-, the ld. Assessing Officer added this amount back to the income of the assessee also. 3. Aggrieved with these additions, the assessee went before the ld. CIT(A). The ld. CIT(A) also issued various notices to the assessee and records the fact that the assessee did not respond. But he decided to handle the issue on merits. He noted the fact that the assessee had failed to explain the cash deposits of Rs. 1,99,64,300/- and therefore, he confirmed the addition in this regard. However, with regard to the addition of unproved sundry creditors amounting to Rs. 8,53,74,436/-, the ld. CIT(A) held that sundry creditors could not be added back under section 68 as they were not unexplained cash credit. He therefore, directed the said addition be deleted. He also upheld the addition made under section 40(a)(ia) on account of failure to deduct tax at source on the payments made for audit, interest and rent amounting to Rs. 27,10,143/-. With regard to the disallowance of Rs. 3,16,15,756/- he held that it was not prudent to disallow the entire expenditure when the assessee had furnished the P&L account and the balance-sheet. However, the assessee also had a responsibility to justify these expenses before the ld. Assessing Officer. Since the same had not been done, he confirmed 20% of the said addition and gave relief to the assessee for the rest. 4. The Department is aggrieved at this decision of the ld. CIT(A) to delete the addition on account of sundry creditors and also to partly delete 3

ITA No. 13/VNS/2025 Kshetriya Shri Gandhi Ashram the disallowance of business expenditure to the extent of Rs. 2,53,20,605/-. Accordingly, it has come in appeal before us on account of the same. Sh. Amalendu Nath Mishra, CIT DR (hereinafter referred to as the ld. CIT DR) appearing on behalf of the Revenue pointed out that the deletions made by the ld. CIT(A) had no basis because the assessee had neither proved the sundry creditors during the assessment proceedings nor during the appeal proceedings. The ld. CIT(A) further submitted that the assessee had failed to justify any part of the claimed expenditure of Rs. 3,16,50,756/-. He pointed out that the deletion made by the ld. CIT(A) was purely on account of theoretical construct rather than the evidence before him and therefore, the deletions made by him was not justified in the facts and circumstances of the case. 5. On the other hand, Sh. Parasaran, Advocate (hereinafter referred to as the ld. AR) appearing on behalf of the assessee drew our attention to the fact that vide certificate granted by the KVIC, Mumbai on 18.11.2017, the assessee was registered with the Khadi and Village Industries Commission for the period 1.04.2016 to 31.03.2021 as a Khadi and Village Industries Unit. He also drew our attention to section 10(23B) of the Income Tax Act and pointed out that income of institutions such as those like the assessee were fully exempt from tax. It was prayed that the institution had applied and accumulated its income solely for the development of Khadi and Village Industries and therefore, it was entitled for the said exemption. Accordingly, it was prayed that in view of the same, the matter may kindly be restored to the file of the ld. Assessing Officer so that the assessee could demonstrate this fact. As such, the additions made were not maintainable in law on account of the exemption that the assessee society enjoyed. It was further submitted that the reasons for failure to make compliance before the ld. CIT(A) or the ld. Assessing Officer had been pointed out and were the 4

ITA No. 13/VNS/2025 Kshetriya Shri Gandhi Ashram unfamiliarity of the assessee with electronic proceedings which resulted in the assessee being unable to keep track of notices and orders. However, he undertook that if the matter was restored back to the file of the ld. Assessing Officer, he would ensure compliance to the various notices issued by the ld. Assessing Officer and ensure that all relevant details were furnished to establish the fact that the assessee was entitled for the exemption. 6. We have duly considered the facts and circumstances of the case. We have also considered the compendium of case laws that have been furnished by the ld. CIT DR in support of the contention of the Department that additions could be made under section 68 on account of failure to explain trade creditors. The said case laws cited by the ld. CIT DR are Narindra Kumar vs. Commissioner of Income-VII, Delhi (2014) 52 taxman.com 127 (Delhi); AKR Poly Industries vs. Income Tax Officer (2026) 186 taxman.com 957 (Madras); Smt. Rekha Krishna Raj vs. Income Tax Officer (2013) 33 taxman.com 64 (Karnataka) and Ram Chandra Singh vs. Commissioner of Income Tax (2024) 164 taxman.com 667 (Patna). On examination of these judgments, it is clear that the decision of the ld. CIT(A) to delete the additions made by the ld. Assessing Officer only on account of the fact that they were classified as sundry creditors and could therefore, not be added back under section 68 is not maintainable. We further note that his decision to delete 80% of the disallowed expenditure without any evidence in support of the same is also not sustainable. However, in consideration of the fact that the assessee claims to be eligible for exemption under section 10(23B) and claims its earlier inability to produce the same on account of its unfamiliarity with electronic proceedings, we deem it appropriate in the interest of justice to restore the matter before us to the file of the ld. Assessing Officer so that the necessary evidences in support of the claim of deduction under section 10(23B) and in support of the various entries made in its accounts, which 5

ITA No. 13/VNS/2025 Kshetriya Shri Gandhi Ashram are the subject matter of additions made by the ld. Assessing Officer, can be presented before him and the ld. Assessing Officer may thereafter consider such evidences and re-visit the conclusions arrived at by him, after consideration of those evidences as may be presented by the assessee during the course of the restored proceedings. Accordingly, the matter stands restored back to the file of the ld. Assessing Officer for a proper finding of fact. The appeal of the Department is held to be allowed for statistical purposes. 7. In the result, the appeal of the Department is held to be allowed for statistical purpose. Orders pronounced on 31.08.2026 in the open Court.

Sd/- Sd/- [SUDHANSHU SRIVASTAVA] [NIKHIL CHOUDHARY] JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 31/08/2026 sh Copy forwarded to: 1. Appellant – 2. Respondent – 3. CIT DR, ITAT, 4. CIT, 5. The CIT(A) By order Sr. P.S.