AMAN THUKRAL,LUDHIANA vs. INCOME TAX OFFICER WARD 2(1), LUDHIANA , LUDHIANA

The brief facts of the case are that the assessee filed his return of income declaring a total income of Rs. 38,81,100/-. The case was selected for complete scrutiny under CASS primarily on the issue of business purchases. During the course of assessment proceedings, the Assessing Officer issued notices under section 142(1) of the Act requiring the assessee to furnish confirmations, copies of income tax returns, bank statements and other documentary evidences from the parties from whom purchases were claimed to have been made.

The Assessing Officer noticed that the assessee had shown purchases aggregating to Rs. 7,20,35,512/- from various parties. According to the Assessing Officer, the assessee failed to furnish complete documentary evidence such as signed confirmations from the suppliers, their bank statements evidencing the transactions and copies of their income tax returns. The Assessing Officer, therefore, carried out independent verification by issuing notices under section 133(6) of the Act and by examining the status of the suppliers through the GST portal.

Based on the verification exercise conducted during the course of assessment proceedings, the Assessing Officer recorded several discrepancies. It was noticed that out of fourteen suppliers from whom purchases were claimed to have been made, the GST registrations of twelve parties had either been suspended or cancelled and only two parties were 886-CHD-2024 6 found to be active. It was further observed that most of the suppliers had either not filed their income tax returns or had declared very meagre income which was not commensurate with the volume of alleged sales made to the assessee.

The Assessing Officer further observed that the confirmation replies filed by the suppliers contained identical explanations stating that the transactions were conducted through a broker who had since expired and that the suppliers could not file their returns due to bad health and losses in business. The Assessing Officer also recorded a categorical finding at page 21 of the assessment order that none of the confirmation letters were signed, none of the suppliers furnished their income tax returns declaring the turnover corresponding to the alleged sales and none produced their bank statements evidencing the transactions with the assessee. On the basis of these observations, the Assessing Officer concluded that the assessee had obtained accommodation bills without actual purchases.

However, considering the fact that the assessee had declared corresponding sales, the Assessing Officer adopted a reasonable approach and disallowed only 50% of the purchase amounting to Rs. 3,60,17,756/-. Apart from this, the Assessing Officer also made additions under section 69C in respect of certain purchases, disallowed a portion of commission expenses, salaries and wages and car expenses and also made an addition on account of sundry creditors, thereby determining the total income of the assessee at Rs. 9,87,11,740/-.

Aggrieved by the assessment order, the assessee preferred an appeal before the Ld. CIT(A). The Ld. CIT(A), after considering the submissions of the assessee and examining the material available on record, concurred with the findings of the Assessing Officer. The Ld. CIT(A) observed at pages 8-9 of the appellate order that the assessee had failed to furnish complete documentary evidence, such as signed confirmations, bank statements of the suppliers and copies of their income tax returns, to substantiate the genuineness of the purchases. The Ld. CIT(A) therefore held that the assessee had failed to discharge the onus cast upon him to prove the genuineness of the transactions and accordingly confirmed the additions made by the Assessing Officer.

Before us, the Ld. Counsel for the assessee submitted that the order passed by the Ld. CIT(A) is not in accordance with the provisions of section 250(6) of the Act. It was submitted that the Ld. CIT(A) has merely reproduced the findings of the Assessing Officer and the submissions of the assessee without recording independent findings or giving proper reasons for confirming the additions. It was contended that the first appellate authority is required to pass a speaking order stating the points for determination, the decision thereon and the reasons for such decision. However, in the present case, the order of the Ld. CIT(A) is a non-speaking order and therefore liable to be set aside.

The Ld. Counsel further submitted that the purchases made by the assessee were duly supported by purchase invoices and were reflected in the GST records. It was contended that merely because some of the suppliers

The Ld. DR further invited our attention to the detailed findings recorded by the Assessing Officer after conducting the verification exercise. The Assessing Officer examined the status of the suppliers from the GST portal and found that out of fourteen parties from whom purchases were claimed, the GST registrations of twelve parties had either been suspended or cancelled and only two parties were active. Further, it was noticed that 886-CHD-2024 11 most of the suppliers had either not filed their income tax returns or had declared meagre income which was not commensurate with the volume of alleged sales made to the assessee. The Assessing Officer also observed that in the confirmation replies filed by the suppliers, identical explanations were given stating that the transactions were carried out through a broker who was no longer alive and that the suppliers could not file their returns due to bad health and loss in business. The Assessing Officer further noticed that none of the confirmation letters were signed, none of the parties furnished their ITRs for the relevant assessment year and none produced their bank statements evidencing the transactions with the assessee.

The Ld. DR specifically referred to the categorical findings recorded by the Assessing Officer at page 21 of the assessment order, wherein it has been noted that although confirmation letters were filed by the parties, (i) none of the confirmations were signed, (ii) none of the parties furnished their ITRs declaring the turnover corresponding to the alleged sales, and (iii) none furnished bank statements evidencing the transactions with the assessee. The Assessing Officer further recorded that the explanation of all the parties was identical and that most of them claimed that the transactions were conducted through a broker who had since expired. The Assessing Officer therefore concluded that the transactions lacked credibility and the surrounding circumstances clearly indicated that no actual purchases had been made from the said parties and only accommodation bills were obtained.

The Ld. DR further submitted that the Assessing Officer, after considering the entire material on record and keeping in view that the assessee had declared corresponding sales, adopted a reasonable approach and disallowed only 50% of the purchases amounting to Rs. 3,60,17,756/-, instead of disallowing the entire amount. It was submitted that the findings of the Assessing Officer were based on detailed verification and objective material and therefore the addition confirmed by the Ld. CIT(A) does not call for any interference.

The Ld. DR referred to the findings recorded at page 21 of the assessment order and submitted that none of the confirmation letters was 886-CHD-2024 13 signed, none of the suppliers furnished their income tax returns, and none produced bank statements evidencing the transactions with the assessee. The Ld. DR further submitted that the explanation given by the suppliers was identical and referred to a broker who had expired, indicating that the transactions lacked credibility. It was therefore contended that the addition made by the Assessing Officer and confirmed by the Ld. CIT(A) was justified. He had drawn our attention to the following finding of Ld. CIT(A) :-

In rebuttal to the submissions made by the Ld. Departmental Representative, the Ld. Authorised Representative (AR) invited our attention to page 7 of the assessment order, wherein the Assessing Officer himself has recorded the following observation:

Referring to the above extract, the Ld. AR submitted that the notices under section 133(6) of the Act were issued directly by the Assessing Officer to the concerned suppliers, and the replies were also furnished directly to the Assessing Officer by those parties. It was therefore contended that the verification exercise was conducted independently by the Assessing Officer and the assessee had no role in the replies furnished by the said parties. The Ld. AR submitted that once confirmations, ledger accounts and copies of sales bills had been furnished by the parties directly to the Assessing Officer in response to the statutory notices issued under section 133(6), the same ought to have been duly appreciated while examining the genuineness of the transactions.

We have heard the rival submissions and perused the material available on record, including the assessment order, the order of the Ld. CIT(A) and the documents placed before us. The controversy in the present appeal primarily relates to the addition made by the Assessing Officer on account of alleged bogus purchases amounting to ₹7,20,35,512/-, out of which the Assessing Officer disallowed 50% of the purchases aggregating to ₹3,60,17,756/- and the same has been confirmed by the Ld. CIT(A).

From the record, it is noticed that during the course of assessment proceedings, the Assessing Officer conducted verification with respect to the 886-CHD-2024 15 suppliers from whom purchases were claimed to have been made by the assessee. The Assessing Officer observed that the assessee had failed to furnish certain documentary evidences such as signed confirmations from the suppliers, copies of their income tax returns and bank statements evidencing the transactions. The Assessing Officer also examined the status of the suppliers on the GST portal and recorded a finding that the GST registrations of several parties had either been suspended or cancelled. Further, the Assessing Officer has recorded at page 21 of the assessment order that the confirmations furnished by the parties were not signed and that the suppliers had not furnished their income tax returns or bank statements evidencing the transactions with the assessee. On the basis of these observations, the Assessing Officer concluded that the assessee had obtained accommodation bills and accordingly disallowed 50% of the purchases.

At the same time, it is also an undisputed fact emerging from the record that the assessee had declared corresponding sales which have been accepted by the Department. The Assessing Officer himself has not disputed the sales disclosed by the assessee. Further, it is also evident from the record that the books of account maintained by the assessee were neither rejected by the Assessing Officer under section 145(3) of the Act, nor has any categorical finding been recorded by the Ld. CIT(A) has not rejected the assessee's books of account. Once the sales declared by the assessee have been accepted and the books of account have not been rejected, it would not be appropriate to sustain the disallowance of a substantial portion of purchases on an ad-hoc basis.

We also take note of the submission of the Ld. AR that the suppliers had responded to the notices issued under section 133(6) of the Act and had furnished confirmations, ledger accounts and copies of sales bills directly before the Assessing Officer. The relevant observation of the Assessing Officer recorded at page 7 of the assessment order also indicates that replies to notices issued under section 133(6) were received from the concerned parties. Thus, though certain deficiencies were noticed by the Assessing Officer in the evidence produced, the fact that the transactions were reflected in the books of account and that the assessee had recorded corresponding sales cannot be ignored.

In such circumstances, the settled position of law as laid down in various judicial pronouncements is that where the sales are accepted, and the purchases are doubted, the entire purchase amount cannot be added to the income of the assessee. In such cases, only the profit element embedded in the alleged non-genuine purchases can be brought to tax to account for possible inflation of the purchase price or savings made by the assessee by procuring goods from the grey market.

In the present case, the Assessing Officer has disallowed 50% of the purchases on an ad-hoc basis without rejecting the books of account of the assessee. In our considered view, such an approach is excessive and not in accordance with the settled principles governing cases of alleged bogus purchases. At the same time, given the discrepancies noted by the Assessing Officer during verification and the assessee's failure to furnish certain

Therefore, taking into consideration the entirety of facts and circumstances of the case and in order to meet the ends of justice, we deem it appropriate to restrict the addition only to the profit element embedded in such purchases. Accordingly, instead of sustaining the disallowance of 50% of the purchases, we direct the Assessing Officer to estimate the profit element embedded in the disputed purchases and bring the same to tax. In our considered opinion, estimation of profit at 10% of the disputed purchases would meet the ends of justice.

The Assessing Officer is therefore directed to restrict the addition to 10% of the purchases treated as non-genuine, and the balance addition is directed to be deleted. In the result this ground is partly allowed.

The Ld. AR further argued that the provisions of section 69C are applicable only where the assessee has actually incurred expenditure and fails to explain the source thereof. In the present case, the assessee had not incurred any expenditure, and therefore, the very foundation for invoking section 69C was absent. It was submitted that the AO had relied solely on third-party information appearing on the portal and the fact that the party did not respond to the notice issued u/s 133(6), without bringing any independent evidence to establish that the assessee had actually made purchases from the said party. In support of the above contentions, reliance was placed on the decisions in ACIT vs. Kishan Lal Jewels (P) Ltd., ACIT vs. Abhishek Exports, CIT vs. Pratapsingh Amrosingh Rajendra Singh, CIT vs. Lubtec India Ltd. and S.F. Wadia vs. ITO, wherein it has been held that addition u/s 69C cannot be made unless it is established that the assessee has actually incurred the expenditure.

The Ld. DR, on the other hand, relied upon the orders of the lower authorities and submitted that the information available on the Insight Portal clearly reflected purchases of Rs. 19,33,905/- made by the assessee from the said party. It was further pointed out that the notice issued u/s 133(6) to the concerned party remained uncomplied with and therefore the 886-CHD-2024 19 AO was justified in drawing an adverse inference and treating the said amount as unexplained expenditure u/s 69C taxable under section 115BBE.

We have heard the rival submissions and perused the material available on record. The addition in the present case has been made by the Assessing Officer solely on the basis of information appearing on the Insight Portal alleging purchases from Sh. Sumanpreet Singh. The assessee, however, has consistently denied having entered into any such transaction and has demonstrated that no such purchases were recorded in the books of account, no payment was made to the said party, and no GST input tax credit was claimed in respect of the alleged purchases. The Assessing Officer has not brought any independent material on record to establish that the assessee had actually made purchases or incurred any expenditure in respect of the alleged transaction.

It is a settled legal position that the provisions of section 69C can be invoked only when it is established that the assessee has actually incurred expenditure and the explanation regarding the source thereof is not satisfactory. In the present case, the Assessing Officer has not established the factum of the incurrence of expenditure, having reference to the assessee's books of account and the bank account. Mere reliance on third- party information appearing on a portal or the non-response of the concerned party to notice issued u/s 133(6) cannot, by itself, lead to the conclusion that the assessee had incurred such expenditure. In the absence of any cogent material establishing that the assessee had actually made the 886-CHD-2024 20 alleged purchases, the conditions necessary for invoking section 69C are not satisfied.

Accordingly, we find merit in the contention of the assessee and hold that the addition of Rs. 19,33,905/- made by the Assessing Officer u/s 69C is not sustainable. The same is directed to be deleted. Ground No. 3 raised by the assessee is allowed.

It was further submitted that the assessee had not claimed any GST Input Tax Credit (ITC) in respect of the disputed purchases and copies of GSTR-9 and ITC reconciliation statements were placed on record to substantiate this fact, which has not been controverted by the Assessing Officer. The Ld. AR explained that the differences arose due to a commercial

According to the assessee, the parties had recorded excess sales in their books and had agreed to reverse the same through GST credit notes, the credit notes were not uploaded on the GST portal. Owing to the refusal of the parties to rectify the GST records, the assessee had initiated civil proceedings against them and copies of the civil suits were placed on record.

The Ld. AR further submitted that the ledger accounts maintained by the assessee and the civil suits filed against the parties completely corroborate the assessee’s books of account and demonstrate that only small outstanding balances of Rs. 6,52,755/- in the case of Garg Woollen Mills and Rs. 2,08,485/- in the case of World International Yarns were actually in dispute. It was argued that a person who allegedly incurred unexplained purchases exceeding Rs. 2.77 crores would not institute civil suits for recovery of such small ledger balances.

On the legal aspect, the Ld. AR contended that section 69C can be invoked only when the Revenue first establishes that the assessee has actually incurred expenditure, which has not been done in the present case. Reliance was placed on the decisions in CIT vs. Lubtech India Ltd. (311 ITR 175) (Del.), S.F. Wadia vs. ITO (27 TTJ 437), ACIT vs. Kishan Lal Jewels (P) Ltd., PMS Diesels vs. Addl. CIT, Abhishek Exports, and CIT vs. Pratapsingh Amrosingh Rajendra Singh, to submit that in the absence of evidence of actual expenditure, no addition can be made u/s 69C. It was also argued that the assessee cannot be asked to prove a negative fact and reliance was 886-CHD-2024 22 placed on the judgment of the Hon’ble Supreme Court in K.P. Verghese vs. CIT (131 ITR 597).

Accordingly, it was prayed that the addition made by the Assessing Officer and sustained by the CIT(A) be deleted in full.

The Ld. Departmental Representative supported the orders of the Assessing Officer and the CIT(A). It was submitted that the addition was made on the basis of information obtained from the concerned parties in response to notices issued u/s 133(6), wherein the parties had reported higher sales made to the assessee than what was reflected in the assessee’s books of account.p The Ld. DR contended that the difference between the purchases shown by the assessee and the sales reported by the parties clearly indicated that the assessee had incurred expenditure outside the books.

The Ld. DR further submitted that the assessee failed to reconcile the discrepancy between the figures reported by the parties and those recorded in its books. According to the Revenue, the explanation of commercial dispute and non-uploading of credit notes was merely an afterthought and the assessee had not produced sufficient evidence to demonstrate that the alleged excess purchases were never made. It was therefore argued that the Assessing Officer was justified in invoking the provisions of section 69C and treating the difference as unexplained expenditure.

We have heard the rival submissions and perused the material available on record. The issue involved in the present ground relates to the addition made by the Assessing Officer under section 69C of the Act

The Assessing Officer, after issuing notices under section 133(6) to the concerned parties, observed that the sales reported by the said parties to the assessee were substantially higher than the purchases recorded by the assessee in its books of account. As noted by the Assessing Officer in para 3.3.3 of the assessment order, the difference was quantified at Rs. 2,54,43,171/- in respect of Garg Woollen Mills and Rs. 23,23,339/- in respect of World International Yarns, aggregating to Rs. 2,77,65,510/-, which was treated as unexplained expenditure under section 69C of the Act.

The contention of the assessee is that the differences arose due to commercial disputes with the said parties during the relevant financial year and that the parties had allegedly recorded excess sales in their books. It has further been submitted that the assessee had not claimed any GST input tax credit in respect of the alleged excess purchases and that civil suits were filed against the said parties for recovery of outstanding balances.

On the other hand, the Revenue has relied upon the confirmations and details furnished by the suppliers in response to notices issued under section 133(6), as well as the fact that the suppliers had reported the sales in their statutory records including GST returns. According to the Revenue, the discrepancy between the sales reported by the suppliers and the purchases recorded by the assessee clearly indicates that the assessee had incurred expenditure outside the books of account.

In our considered view, the material available on record indicates that business transactions existed between the parties; however, the precise nature and quantum of the disputed transactions require proper verification with reference to the books of account of the assessee, the confirmations and records of the suppliers, and the GST returns and other statutory documents of both sides. Such verification assumes importance particularly in view of the explanations furnished by the assessee regarding the commercial disputes and the civil proceedings initiated against the parties.

Considering the entirety of the facts and circumstances of the case, we are of the view that the issue requires fresh examination at the level of the Assessing Officer. Accordingly, we set aside the orders of the lower authorities on this issue and restore the matter to the file of the Assessing Officer with a direction to examine the reconciliation of purchases with 886-CHD-2024 25 reference to the suppliers’ confirmations, GST records, civil suit documents and other relevant evidences that may be furnished by the assessee. Further the Assessing Officer shall give opportunity to assessee to examine these two persons, if so demanded by the assessee .

The Assessing Officer shall afford adequate opportunity of being heard to the assessee and decide the issue afresh in accordance with law. Accordingly, Ground No. 4 raised by the assessee is allowed for statistical purposes.

During the course of assessment proceedings, the Assessing Officer observed that the assessee had claimed commission expenses paid to various agents for procuring sales orders. According to the Assessing Officer, the assessee failed to satisfactorily justify the genuineness of the commission payments. The AO noted that confirmations furnished by the agents were in a similar format and appeared to be written in similar handwriting. It was also observed that the agents had not furnished details of their turnover and that there was absence of written correspondence such as emails or agreements evidencing the services rendered. On the basis of these observations, the AO concluded that the assessee had not fully substantiated that the commission expenditure was incurred wholly and 886-CHD-2024 26 exclusively for the purposes of business and accordingly disallowed 80% of the commission expenditure, while allowing only 20%.

Before the Ld. CIT(A), the assessee submitted that the commission payments were genuine business expenditures incurred for procuring sales through commission agents, which is a normal practice in the textile industry. It was submitted that the assessee had furnished complete documentary evidences including ledger accounts of the commission agents, confirmations along with PAN details, income tax returns and bank statements of the agents, TDS details and the list of customers whose orders were procured through the agents. It was contended that the identity of the agents, the genuineness of the payments and the business nexus of the expenditure stood fully established. The assessee further submitted that all payments were made through banking channels after deduction of tax at source and the commission income had been offered to tax by the recipients.

Before us, it was argued that the observations of the AO regarding a similar format of confirmations or similarity in handwriting were purely conjectural and unsupported by any expert opinion. The assessee also contended that the absence of written correspondence cannot lead to the conclusion that services were not rendered, particularly when sales facilitated through such agents were accepted by the department. It was emphasised that the AO did not exercise his powers to summon or examine the commission agents, nor did he bring any material on record to show that the payments had been returned to the assessee.

The Ld. Departmental Representative, on the other hand, relied upon the findings recorded by the lower authorities and submitted that the assessee failed to produce adequate evidence demonstrating the actual services rendered by the commission agents and therefore the disallowance made by the Assessing Officer was justified.

We have heard the rival submissions and perused the material available on record. The issue involved in this ground relates to the disallowance of 80% of the commission expenditure amounting to Rs. 28,48,416/- out of the total commission of Rs. 35,60,520/- claimed by the assessee.

The Assessing Officer disallowed the major portion of the commission expenditure primarily on the ground that the assessee could not furnish adequate documentary evidence to substantiate the services rendered by the commission agents. The AO observed that the confirmations furnished were 886-CHD-2024 28 in a similar format, appeared to be written in similar handwriting, and that there was an absence of written correspondence or documentary proof demonstrating the actual services rendered by the agents. On this basis, the AO held that the assessee had failed to fully establish that the commission expenditure was incurred wholly and exclusively for the purposes of business and consequently disallowed 80% of the commission expenditure, allowing only 20%.

On the other hand, the contention of the assessee is that the commission payments were genuine business expenditures incurred for procuring orders through agents, which is a common trade practice in the textile and hosiery industry. The assessee submitted that it had furnished documentary evidence, including ledger accounts of the agents, confirmations with PAN details, income tax returns and bank statements of the commission agents, TDS details, and the list of customers to whom sales were facilitated through the agents. It was further submitted that all payments were made through banking channels after deduction of tax at source, and the commission income had been duly reflected in the returns of income of the recipients. The assessee also contended that the books of account were not rejected by the Assessing Officer, and the corresponding sales facilitated through these agents have been accepted as genuine.

After considering the rival submissions and examining the material on record, we find that the assessee has placed certain documentary evidences such as confirmations, PAN details, bank statements and TDS details in support of the commission payments. The identity of the payees and the fact

At the same time, it is also noticed that the assessee has not placed on record sufficient material to conclusively demonstrate the precise nature of services rendered by each of the commission agents. The absence of supporting evidence such as agreements, correspondence or other contemporaneous records indicating the actual role played by the agents creates certain doubts regarding the full extent of the commission expenditure claimed.

In these circumstances, we are of the considered view that the disallowance of 80% of the commission expenditure made by the Assessing Officer is excessive and not justified, particularly when the sales corresponding to the commission payments have been accepted and the payments have been made through banking channels after deduction of tax at source. At the same time, given deficiencies in the supporting evidence regarding the services rendered by the agents, the entire claim for commission expenditure cannot be accepted in full.

Accordingly, in the interest of justice and fairness, we deem it appropriate to restrict the disallowance to 20% of the total commission expenditure claimed by the assessee. The Assessing Officer is therefore directed to allow the commission expenditure to the extent of 80% and sustain the disallowance only to the extent of 20%. Thus, the addition is 886-CHD-2024 30 restricted to Rs. 7,12,104/- (being 20% of Rs. 35,60,520/-) and the balance disallowance is directed to be deleted.

The Ld. AR before us submitted that the impugned disallowance was made on mere suspicion without properly appreciating the documentary evidence furnished during the assessment proceedings. It was contended that the assessee had furnished person-wise details of salary and wages, employee declarations, salary registers for selected months, and copies of 886-CHD-2024 31 salary vouchers, which clearly established the identity of employees and the genuineness of the payments. The AR further submitted that the payments were made during Financial Year 2020–21, which coincided with the COVID-19 pandemic, when migrant labourers and workers in the textile/hosiery industry preferred frequent cash payments due to lack of banking access and uncertainty during lockdowns.

It was also argued that section 40A(3) was not violated, as the statutory limit applies per person per day, and payments to individual employees never exceeded the prescribed limit. The AR further pointed out that out of the total salary and wages, Rs. 6,33,300/- was paid through banking channels; yet, the AO applied a blanket disallowance to the entire expenditure, thereby demonstrating the arbitrary nature of the addition. It was also emphasised that the books of account were not rejected, the cash book and bank withdrawals clearly showed availability of cash, and no defect was pointed out by the AO in the supporting records.

Reliance was placed on several judicial precedents including Gali Subba Raju vs ACIT (ITAT Visakhapatnam), Munish Arora vs ACIT (ITAT Chandigarh), Gurdas Garg vs CIT (Punjab & Haryana High Court), Dhuri Wine (ITAT Chandigarh), Attar Singh Gurmukh Singh vs ITO (Supreme Court) and other decisions to contend that where the identity of payees and genuineness of expenditure are not doubted, disallowance under section 40A(3) cannot be made merely because payments were made in cash.

On the other hand, Ld. DR relied upon the order passed by lower authority.

It is also noted that the books of account of the assessee have not been rejected, and the availability of cash for making salary payments was duly supported by the cash book and bank withdrawals recorded in the regular books of account. Once the books of account are accepted and the genuineness of the expenditure is not disproved, an ad hoc disallowance cannot be sustained merely on suspicion or surmises.

Further, the provisions of section 40A(3) are attracted only where a payment exceeding the prescribed monetary limit is made to a person in a single day, other than through banking channels. In the present case, the AO has not demonstrated that the payments to any individual employee exceeded the prescribed limit. Moreover, a portion of the salary expenditure amounting to Rs. 6,33,300/- was admittedly paid through banking channels, yet the AO applied a uniform disallowance on the entire amount,

At the same time, considering the fact that a substantial portion of the salary and wages was paid in cash and the pattern of frequent payments may give rise to some verification concerns, we are of the considered view that the disallowance of 25% of the total salary and wages is excessive and unreasonable.

In the interest of justice and to meet the ends of fairness, we deem it appropriate to restrict the disallowance to 5% of the cash component of salary and wages, instead of 25% of the total expenditure as made by the Assessing Officer.

Accordingly, the disallowance made by the Assessing Officer at Rs. 11,48,800/- is reduced, and the AO is directed to recompute the disallowance at 5% of the cash payments of salary and wages. The assessee thus gets partial relief on this ground. Thus Ground No. 6 is partly allowed.

The Ld. Assessing Officer observed that the assessee had claimed car expenses of ₹2,02,500/- in the Profit & Loss Account. Since no logbook was maintained to establish exclusive business use of the vehicles, and the vouchers produced were mostly self-made, the Assessing Officer held that 886-CHD-2024 34 the possibility of personal use of the vehicles could not be ruled out. Accordingly, the Ld. AO made an ad-hoc disallowance of 1/3rd of the total car expenses amounting to ₹67,500/- and added the same to the income of the assessee.

After considering the rival submissions and examining the material on record, we find that the assessee has claimed car expenses amounting to ₹2,02,500/- and has already made a voluntary disallowance of ₹25,000/-

At the same time, it is also a settled position that in the absence of a log book or other contemporaneous evidence, the possibility of some element of personal use of motor cars cannot be completely ruled out, particularly in the case of a proprietorship concern where the distinction between personal and business use may overlap.

Considering the totality of facts and circumstances of the case, and keeping in view that the assessee has already made a reasonable suo motu disallowance of ₹25,000/-, we are of the considered view that the same sufficiently takes care of the element of personal use of the vehicles. Therefore, the further disallowance of ₹67,500/- made by the Assessing Officer is excessive and unwarranted.

The Assessing Officer therefore held that the assessee had failed to establish the identity, creditworthiness and genuineness of such creditors and proceeded to make an addition of 25% of the said amount i.e. Rs. 2,46,55,616/- by invoking the provisions of section 68 of the Income Tax Act, 1961.

The Ld. CIT(A) confirmed the addition, observing that during the appellate proceedings, the assessee also did not furnish confirmation letters, signed ledger accounts, copies of ITRs and bank statements of the concerned creditors.

Before us, the Ld. AR submitted that the addition has been made without properly appreciating the factual position and the documentary evidences placed on record. It was contended that certain balances treated by the Assessing Officer as sundry creditors were in fact advances to suppliers and that one creditor balance was omitted from the list prepared

It was further submitted that a substantial portion of the remaining balances represented brought-forward balances from earlier years, in respect of which no purchases were made during the relevant previous year. The Ld. AR also submitted that detailed statements of accounts of these parties for the subsequent years were furnished before the lower authorities to demonstrate that the outstanding balances were subsequently settled.

The Ld. DR, on the other hand, supported the orders of the lower authorities and submitted that the assessee failed to furnish complete documentary evidences to substantiate the creditors and therefore the Assessing Officer was justified in drawing an adverse inference.

We have heard the rival contention of the parties and perused the material available on the record. After considering the rival submissions and examining the record, we find that the issue requires verification of factual aspects, particularly with regard to the nature of the balances, the claim of the assessee that certain amounts represent advances to suppliers, the contention that several balances are brought-forward liabilities from earlier years, and the assessee’s submission regarding subsequent settlement of the outstanding amounts. These factual assertions require proper verification with reference to the books of account and supporting documentary evidences.

Considering the totality of the facts and circumstances of the case, we are of the view that the issue requires fresh verification at the level of the Assessing Officer. Accordingly, the impugned addition sustained by the Ld. CIT(A)/ ground no 8 pertain to the Addition on account of alleged unverifiable Sundry Creditors is set aside and the matter is restored to the file of the Assessing Officer for fresh adjudication. The Assessing Officer shall examine the evidence and explanations furnished by the assessee, including confirmations, ledger accounts, details of advances to suppliers, brought-forward balances and subsequent payments, and decide the issue afresh in accordance with law after providing adequate opportunity of being heard to the assessee. Accordingly, Ground No. 8 raised by the assessee is allowed for statistical purposes

Before us, the Ld. AR submitted that the disallowance has been made merely on presumption and conjectures without bringing any adverse material on record. It was contended that none of the payments exceeded the prescribed limit of Rs. 10,000 per person per day, and therefore the provisions of section 40A(3) are not attracted. It was further submitted that the assessee had furnished complete documentary evidences including employee-wise details of bonus, Aadhaar cards of employees and date- wise acknowledgement of payments made to the employees. The Ld. AR also explained that the payments were made in cash considering the nature of the hosiery industry where the workforce mainly consists of daily wage and migrant labourers who prefer cash payments, particularly during the COVID-19 period. It was further contended that the books of account were not rejected and the genuineness of bonus payments has not been doubted by the Assessing Officer.

We have considered the rival submissions and perused the material available on record. From the assessment order it is observed that the disallowance has been made primarily on the presumption that the payments were split to avoid the provisions of section 40A(3). However, the assessee has placed on record various documentary evidences including employee-wise details of bonus payments, identity documents of employees and acknowledgements of receipt of bonus. These documents require proper verification. It is also the contention of the assessee that none of the payments exceeded the statutory limit prescribed under section 40A(3) and that the payments were made out of duly recorded cash balance available in the books of account.

In our considered view, these factual aspects require proper verification at the level of the Assessing Officer. Since the evidences placed by the assessee need examination and the lower authorities have not carried out detailed verification of the same, we deem it appropriate to restore the matter to the file of the Assessing Officer.