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Facts
The assessee, a real estate development firm, filed a return declaring a loss. During assessment, discrepancies were found in sundry creditor balances compared to the assessee's books. The Assessing Officer treated these differences as unexplained purchases under Section 69C of the Income Tax Act.
Held
The Tribunal held that the additions under Section 69C were not justified as the assessee had not incurred any expenditure. The differences were due to accounting timing or disputed bills, not actual unexplained purchases. The precondition of expenditure incurred for invoking Section 69C was absent.
Key Issues
Whether discrepancies in sundry creditor balances, attributed to timing differences or disputed bills, can be treated as unexplained purchases under Section 69C of the Income Tax Act when no expenditure was actually incurred by the assessee.
Sections Cited
143(3), 133(6), 69C, 271AAC
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Income Tax Appellate Tribunal, “SMC” BENCH, AHMEDABAD
Before: SHRI SIDDHARTHA NAUTIYAL & SHRI MAKARAND V.MAHADEOKARShri Barfani Dadaji Buildcon
This appeal filed by the assessee is directed against the order passed by the learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi [hereinafter referred to as “CIT(A)”], dated 24.03.2025, arising out of the assessment order framed by the Assessing Officer under section 143(3) of the Income Tax Act, 1961 [hereinafter referred to as “the Act”] dated 19.12.2019 for the Assessment Year 2017-18.
Facts of the Case 2 2.1 The assessee is a partnership firm engaged in the business of real estate development. The assessee filed its original return of income for the year under consideration on 26.10.2017 declaring a total loss of Rs.2,02,342/-. The case of the assessee was selected for scrutiny assessment through CASS on the ground that the assessee was engaged in real estate business with high closing stock, higher turnover reported in the service tax return as compared to income disclosed in the ITR, and large investment in immovable properties as compared to the total income declared.
2.2 During the course of assessment proceedings, the Assessing Officer noted that the assessee had disclosed certain sundry creditors in its books of account. In order to verify the genuineness and correctness of such creditors, the assessee was called upon to furnish names, addresses, and PAN details. Thereafter, notices under section 133(6) of the Act were issued to the creditors directly. On the basis of replies received from certain creditors and the absence of replies from others, the Assessing Officer noticed discrepancies between the balances confirmed by the creditors and the balances as per the books of the assessee.
2.3 The Assessing Officer tabulated such differences and found that in the case of M/s Rai Granite & Ceramic there was a difference of Rs.5,00,000/-, in the case of A J Bricks a difference of Rs. 6,99,600/- , and in the case of Prahladbhai Ashabhai Prajapati Prop. Jay Shree Chamunda Transport a difference of Rs. 1,06,000/-. In addition, with regard to other creditors, namely Amarsingh P Mahor Satvasiya Designing, G B Developers, Samir Uttamchandra Shah, Kalpeshkumar Prahladbhai Patel, and others, no replies were received. In totality, the Assessing Officer had initially issued a show 2.4 In response, the assessee filed explanation vide letter dated 12.12.2019. In respect of M/s Rai Granite & Ceramic, it was submitted that no purchases were made to the extent of Rs.5,00,000/- and the difference arose for other reasons. However, the Assessing Officer was not satisfied, as no corroborative evidence was filed and even the creditor’s balance sheet did not support the assessee’s contention. Accordingly, the difference of Rs. 5,00,000/- was treated as unexplained purchase expenditure and added to the income under section 69C of the Act. Similarly, in the case of A J Bricks, the assessee attributed the difference of Rs.6,99,600/- to non- accounting of three bills owing to a rate dispute. However, the Assessing Officer noted that such explanation was not supported by bills, confirmations, or proper evidence, and therefore the difference was added as unexplained expenditure under section 69C. In the case of Prahladbhai Ashabhai Prajapati, a difference of Rs. 1,06,000/- was explained on account of rate dispute and unbooked bills, but the Assessing Officer found no satisfactory proof. The said amount was also added as unexplained expenditure under section 69C.
2.5 The Assessing Officer therefore made a total addition of Rs.13,05,600/- being the aggregate of unexplained balances in the accounts of the above three creditors. The returned loss of Rs.2,02,342/- was adjusted, and the assessed income was determined at Rs. 11,03,260/-. The assessment was thus completed under section 143(3) on 19.12.2019. The Assessing Officer also initiated penalty proceedings separately under section 271AAC for furnishing of inaccurate particulars of income.
4 2.6 The assessee carried the matter in appeal before the learned CIT(A). The learned CIT(A), after calling for written submissions and obtaining a remand report from the Assessing Officer, proceeded to adjudicate the matter. The assessee reiterated that the differences in balances with sundry creditors were either on account of rate disputes or timing differences in accounting and could not be construed as unexplained purchases. Reliance was placed on the submissions earlier filed before the Assessing Officer.
2.7 The learned CIT(A), however, after considering the explanation of the assessee, recorded that the assessee had failed to reconcile the differences with cogent evidence, bills, or confirmations from the parties concerned. The learned CIT(A), therefore, dismissed the appeal of the assessee and upheld the assessment order of the Assessing Officer in toto, thereby confirming the total addition of Rs.13,05,600/- 2.8 Aggrieved by the order of CIT(A), the assessee is in appeal before us raising following grounds:
1. The learned CIT(A) erred in law and on facts of the case by treating difference in balance of sundry creditors as unexplained purchases and thereby making addition of Rs.13,05,600/- to the returned income.
2. Your Appellant, therefore, prays to delete the said addition of Rs.13,05,600/- 3. The appellant reserves the right to add, alter or amend any of the grounds of appeal.
2.9 During the course of hearing, the learned Authorised Representative (AR) reiterated the factual background of the case and placed reliance upon the written submissions, which were already filed before the authorities below and also reiterated before us.
5 2.10 The assessee’s defence, as reiterated by the AR, is that the said differences cannot be considered as unexplained purchases. It was argued that in the case of M/s Rai Granite & Ceramic, the assessee had not purchased any goods of Rs. 5,00,000/- from the said party and had not recorded any such liability in its books. The difference in the account of the creditor arose on account of a unilateral entry passed by the creditor, which was not acceptable to the assessee. It was stressed that section 69C can apply only when the assessee has incurred expenditure but has failed to explain the source thereof. When the assessee has neither purchased nor accounted for the said sum, no expenditure has been incurred in the first place, and therefore, provisions of section 69C are not attracted. Reliance was placed on the copy of accounts filed from both sides to demonstrate that the assessee had not debited its books by such amount.
2.11 With regard to M/s A.J. Bricks, the difference of Rs. 6,99,600/- arose on account of three bills, namely Bill No. 27 dated 31.10.2016 for Rs.79,200/-, Bill No. 37 dated 01.01.2017 for Rs.4,62,000/-, and Bill No. 30 dated 01.01.2017 for Rs. 1,58,400/-. The assessee explained that these bills were disputed due to difference in rates and hence were not recorded in the books for the year under consideration. It was pointed out that ultimately the dispute was settled, and the said liability was recognised in the subsequent financial year, i.e., in March 2018, corresponding to Assessment Year 2018-19. Thus, the assessee argued that there was no claim of such purchase in Assessment Year 2017-18, and therefore the difference could not be treated as unexplained purchase expenditure in this year.
2.12 As regards Prahladbhai Ashabhai Prajapati Prop. Jay Shree Chamunda Transport, the assessee explained that the difference of 6 Rs.1,06,000/- was similarly on account of three disputed bills, namely Bill No. 27 dated 31.10.2016 for Rs. 12,000/-, Bill No. 36 dated 31.12.2016 for Rs. 70,000/-, and Bill No. 30 dated 30.11.2016 for Rs.24,000/-. These bills had been debited by the creditor in its books during the financial year relevant to Assessment Year 2017-18, whereas the assessee accounted for the same in March 2018, relevant to Assessment Year 2018-19, after settlement of dispute. Here again, the assessee contended that no purchase expenditure was claimed in the year under consideration and hence section 69C was wrongly applied.
2.13 The learned AR further drew our attention to the copies of ledger accounts of the assessee as well as the contra accounts obtained from the creditors, which had already been placed before the lower authorities. It was submitted that these extracts clearly demonstrate that the differences arose merely because of timing of accounting and disputed entries rather than on account of any actual unexplained purchases. The AR therefore maintained that the ledger account extracts clearly explained the apparent differences in balances. The additions sustained by the lower authorities under section 69C were based on an incorrect appreciation of facts and a misapplication of law. It was stressed that unless the assessee had actually incurred an expenditure and failed to explain the source thereof, no addition could be sustained under section 69C. The AR thus prayed that the impugned addition of Rs.13,05,600/- be deleted in full.
The learned Departmental Representative, on the other hand, placed strong reliance upon the findings recorded by the Assessing Officer in the assessment order and by the learned CIT(A) in the appellate order.
7 4. We have heard the rival submissions and carefully considered the orders of the lower authorities, the written submissions of the assessee, and the material placed before us. The limited controversy in the present appeal is whether the addition of Rs.13,05,600/-, sustained by the learned CIT(A) on account of differences in the balances of three creditors, namely M/s Rai Granite & Ceramic (Rs.5,00,000/-), M/s A.J. Bricks (Rs. 6,99,600/-), and Prahladbhai Ashabhai Prajapati Prop. Jay Shree Chamunda Transport (Rs.1,06,000/-), is justified under section 69C of the Act.
4.1 The Assessing Officer proceeded on the basis that since the balances as per the creditors’ confirmations did not tally with the balances as per the assessee’s books, the differences represented unexplained purchases and were required to be added under section 69C. The learned CIT(A) also endorsed this view and sustained the additions on the ground that the assessee had not produced satisfactory evidence to explain the discrepancies.
4.2 It is, therefore, necessary to examine the scope of section 69C. The provision, in essence, applies where in any financial year an assessee has incurred any expenditure and offers no explanation about the source of such expenditure, or where the explanation offered is not found satisfactory by the Assessing Officer. In such circumstances, the amount covered by such expenditure may be deemed to be the income of the assessee. It follows, therefore, that the sine qua non for invoking section 69C is that there must be an expenditure actually incurred by the assessee. Unless the expenditure is first established, there is no occasion to examine the source of such expenditure.
8 4.3 In the present case, we find considerable force in the contention of the assessee that in respect of M/s Rai Granite & Ceramic, the difference of Rs. 5,00,000/- was not on account of any purchase recorded by the assessee but on account of a unilateral debit passed in the books of the creditor. The assessee had never debited its purchase account nor recognised the corresponding liability in its books. Thus, in absence of any expenditure having been incurred, the question of treating the difference as unexplained expenditure under section 69C does not arise.
4.4 In respect of M/s A.J. Bricks, the difference of Rs. 6,99,600/- is traceable to three bills which were admittedly disputed by the assessee on account of rate differences. The assessee has demonstrated, with the help of ledger extracts, that these bills were not recorded in its accounts during the year under consideration but were ultimately recognised in the subsequent financial year when the dispute was settled. This factual explanation is borne out of the comparative ledgers of both the assessee and the creditor, which were placed before the lower authorities and again reiterated before us. It is evident that the assessee did not claim deduction of such purchases in the computation of income for the year under consideration. When no such expenditure was debited in the year under appeal, there was no basis for invoking section 69C.
4.5 Similarly, with respect to Prahladbhai Ashabhai Prajapati Prop. Jay Shree Chamunda Transport, the difference of Rs. 1,06,000/- arose on account of three bills raised in F.Y. 2016-17 but accounted for by the assessee only in March 2018, corresponding to Assessment Year 2018-19. The explanation of the assessee that the dispute was settled subsequently and liability recognised in the next year has not been controverted by the Revenue with any contrary material. The 9 assessee has also not claimed any deduction of such purchases in the year under consideration. In such circumstances, the necessary precondition of “expenditure incurred” within the meaning of section 69C is absent.
4.6 We thus find that in all the three cases the additions sustained by the authorities below rest on the sole foundation of mismatch between balances as per the assessee’s books and as per the creditors’ accounts. Such differences, when properly reconciled with the help of ledgers and the surrounding circumstances, do not establish that the assessee had incurred unexplained expenditure. It is a settled position of law that addition under section 69C cannot be sustained unless there is a clear finding that expenditure was actually incurred and the assessee failed to explain the source thereof. In the instant case, the Revenue has not brought any material on record to prove that the assessee had incurred the impugned expenditure in the relevant year.
4.7 We, therefore, hold that the learned CIT(A) was not justified in sustaining the addition of Rs.13,05,600/- made by the Assessing Officer. The said addition is directed to be deleted.
In the result, the appeal of the assessee is allowed.
Order pronounced in the Court on 29th September, 2025 at Ahmedabad.