INCOME TAX OFFICER, NEW LIBRA KOTHI, RAILWAY ROAD, SIRHIND vs. BHAGWAN DASS, AMLOH ROAD, MANDI GOBINDGARH

Whether on the facts and in the circumstances of the case the Ld. CIT (A) is correct in deleting the addition of Rs.24,82,734/ under section 68 read with section 115BBE of the I.T. Act, 1961 on account of Unexplained Sundry Creditors.

Whether on the facts and in the circumstances of the case the Ld. CIT(A) is correct in allowing the assessee's claim of GST paid of Rs.12,38,488/- under section 36(1)(vii) of the Act, 1961 which was disallowed by the AO.

Whether on the facts and in the circumstances of the case the Ld. CIT(A) is correct in restricting the addition on account of Unverifiable purchases of Rs.5,07,64,711/- to Rs.4,26,423/-.

Whether on the facts and in the circumstances of the case the Ld. CIT(A) is correct in deleting the addition of Rs.1,23,82,913/ on account of difference of purchases.

It is prayed that the order of Ld. CIT(A) be set aside on the issued mentioned above and that of the assessing officer be restored. 6 That the appellant craves leave to add or amend any grounds of appeal before the appeal is heard and finally disposed off. Briefly, the facts of the case are that the assessee, Shri Bhagwan Dass, an individual engaged in the business of trading in iron and scrap under the proprietorship concern M/s Bhagwan Steel, filed his return of income for A.Y. 2021-22 on 25.02.2022, declaring a total income of Rs.11,05,810/-. The return was processed under section 143(1) of the Act. Subsequently, the case was selected for complete scrutiny under CASS, for complete scrutiny with the reason “Assessee has made substantial purchases from such suppliers who are either Non-Filer(s) or have filed non-business ITR or reflected a substantially lower turnover in ITR as compared to turnover shown in GSTR 1 return.". Thereafter, notices under sections 143(2) and 142(1) along with detailed questionnaires were issued on various dates calling for documentation and information.

1 In response, the assessee furnished partial details on different dates, including copies of the ITR, audit report, balance sheet, GST returns, bank statements, and certain confirmations. However, the assessee failed to file complete and satisfactory evidences, particularly in respect of two sundry creditors amounting to Rs. 24,82,734/-, whose confirmations were filed without PAN details and pertained to outstanding balances of the preceding year. The assessee did not furnish confirmations for the earlier year nor the corresponding bank statements to substantiate the genuineness of the creditors. The Assessing Officer noted that despite being granted repeated opportunities, the assessee could not prove the identity, creditworthiness, and genuineness of the said creditors. Accordingly, applying section 68 read with section 115BBE, the Assessing Officer treated the outstanding balances as unexplained cash credits.

2 Further, the Assessing Officer observed from the Profit & Loss Account that the assessee had claimed GST expenses pertaining to FY 2018-19 amounting to Rs. 12,38,488/- although the same related to an earlier assessment year. The assessee admitted that this GST was paid not on account of his own liability but on behalf of suppliers who had collected GST but had failed to deposit it. The Assessing Officer held that such payment represented the liability of third parties and was neither a business expense of the assessee nor allowable under section 36(1) (vii). Additionally, the AO noted that the assessee's method of accounting for GST excluded GST from purchases and sales; hence, claiming GST as an expense was impermissible. Accordingly, the expenditure was disallowed in full.

3 A major issue considered by the Assessing Officer was the genuineness of purchases aggregating to Rs.5,07,64,711/- from several suppliers who were flagged as non-genuine. Notices under section 133(6) issued to these parties remained uncomplied with. The matter was referred to the Verification Unit, which conducted physical enquiries. The verification reports showed that many suppliers were either non-existent, untraceable, or not operating at the stated addresses, and in certain cases, even the house numbers mentioned did not exist. In one case where summons under section 131 were served, no compliance was made. Based on these findings, the AO held that the alleged suppliers were not genuine and that the purchases were fictitious, warranting disallowance of the entire amount of Rs. 5,07,64,711/-.

4 The AO further compared the assessee's purchase data with the GST data available with the Department. While the assessee reported purchases of Rs. 41,92,68,077/-, the GST data reflected purchases of Rs.40,68,62,366/- there is a difference of Rs.1,24,05,711/-. Even after adding insurance entries of Rs.22,798/-, α difference of Rs.1,23,82,913/- still remained unexplained. The AO observed that ledger accounts received from suppliers in response to section 133(6) did not match the assessee's comparative chart and that the assessee appeared to have manipulated purchase figures. The AO accordingly held that the assessee had inflated purchases by recording false entries, attracting disallowance.

5 Based on these issues and the assessee's failure to give proper explanations or full documents, the Assessing Officer added the unexplained amount to income under sections 68, 69C, and other rules. The assessment was completed under section 143(3), with total income fixed at Rs.6,79,94,456/-.

Against the order of AO the Assessee went in appeal before the Ld. CIT(A). After considering the assessment order, the CIT(A) observed that the addition of Rs.24,82,734/- made under section 68 could not be sustained because it was an admitted fact, even as noted by the Assessing Officer himself, that the impugned creditor balances belonged to the preceding assessment year and no fresh credit had arisen during the relevant previous year. Since section 68 can be invoked only if a sum is credited in the books during the year under consideration, and as no such credit existed in the present case, the conditions for application of section 68 were not fulfilled. By relying on the decision of ITAT Kolkata Bench in the case of Sanjay Mehta Vs. ACIT, Circle-36, Kolkata in ITA No. 1440/Kol/2018, the CIT(A) deleted the entire addition.

1 With respect to the disallowance of Rs.12,38,488/- on account of GST paid by the assessee, the CIT(A) found that the assessee had incurred liability to pay GST due to the default of suppliers in depositing the tax collected from him, and such liability crystallized during the relevant year as per section 16(2)(c) of the CGST Act. The amount paid became a business debt written off and was therefore allowable under section 36(1)(vii), and even otherwise qualified as a business expenditure under section 37 in view of the Supreme Court's decision in case of Pr. CIT-6 Vs. Khyati Realtors Pvt. Ltd. in Civil Appeal No. of 2022 (@ Special Leave Petition (Civil) No. 672 of 2020). Accordingly, the disallowance was deleted.

2 On the issue of the large addition of Rs.5,07,64,711/- towards alleged bogus purchases, the CIT(A) observed that although some suppliers were found non- traceable or unresponsive during verification under section 133(6), the assessee had produced purchase invoices, e-way bills, lorry receipts, toll receipts, stock records, bank statements and corresponding sales, all of which were accepted by the Assessing Officer. Since the books were not rejected and the sales were undisputed, it was held that the entire purchases could not be disallowed. Following the principle laid down by the Bombay High Court in case of Pr. Commissioner of Income Tax-17 Vs. M/s Mohhammad Haji Adam & Company in ITA No. 1004 of 2016 dt. 11/02/2019 the CIT(A) in its order held that “average rate of GP of FY 2017-18 to F Y 2020-21 being 0.84% which comes to Rs.4,26,423/- being 0.84% of Rs.5,07,64,711/-should be added. While modifying the addition made by AO, I am conscious that effective rate of GP on disputed purchase comes to 1.48% (0.65% declared by the appellant plus 0.84% now added by me). In the result the Ground no.5 of the appellant is partly allowed and the addition of Rs.5,07,64,711/- is restricted to Rs.4,26,423/-"

3 Regarding the addition of Rs.1,23,82,913/- on account of differences in purchase figures, the CIT(A) has given his finding in para 5.5.2 of its order wherein the Ld. CIT(A) held that after careful examaination of the documents, the AO has made the addition based on complete misunderstanding of facts and without considering the reconciliation filed by the assessee during the coure of assessment proceedings, specially when the reconciliation was given during the course of assessment proceedings and stands reproduced in the order of the AO.

Feeling aggrieved by the order of the Ld. CIT(A) the Department is in appeal before us.

During the course of hearing, Ld. DR relied upon the assessment order. His contentions against the various additions which stand deleted and challenged by the revenue are as under:

1 Against deletion of Rs.24,82,734/- u/s 68, it was submitted that CIT(A) wrongly held that Section 68 cannot apply to opening balances. It was argued that even if it is an opening balance, the assessee must prove identity, genuineness, and creditworthiness at least in the year of origin.

2 Against Deletion of Rs.12,38,488/- (GST Expense), it was submitted that CIT(A) erred in treating GST paid on behalf of suppliers as assessee's debt. This is not assessee's debt, but merely a voluntary payment of other people's statutory default and as such AO's disallowance should be restored.

3 Against Partial Relief in Bogus Purchases (Reduction from Rs.5,07,64,711/- to GP Addition of Rs.4,26,423/-), it has been contended that CIT(A) assumed sales are genuine without any reasoning. AO found all 8 suppliers non-existent, addresses fake, no GST compliance, non-filers, and no 133(6) compliance. CIT(A) failed to appreciate that matching of quantitative tally does NOT prove purchases, because bogus billing syndicates provide fake invoices with matching quantities. No doubt, stock register, e-way bills, bilties, bank payments stand matched, but all these records do not prove that the purchases are genuine. As such, the entire addition of Rs.5,07,64,711/- should be restored.

4 Against Deletion of Rs.1,23,82,913/-, it was submitted that the order of CIT(A) is non-speaking on this issue. The assessing officer had rightly made the addition in the absence of complete reconciliation with documentary evidence. As such, it was prayed that the addition of Rs.1,23,82,913/- should be restored.

During the course of hearing, the Ld. AR presented the assessee's arguments in a point-wise manner, the summarized details of which are as follows:

1 Ground No.1- Ld. AR submitted that the AO made an addition u/s 68 of Rs. 24,82,734/- on account of unexplained creditors. Section 68 addition is unsustainable, relates to old balances, not current credits. Reference is made to Para 5.1 to 5.1.2 of the order of Ld. CIT(A) wherein the addition was deleted since no sum was credited during the year and they were opening balances. Reliance is placed on the findings of the Ld. CIT(A) in Para 5.1.2 by the assessee.

2 Ground No.2- Ld. AR submitted that the AO disallowed GST payment of Rs.12,38,488/- GST expense crystallized during year, which is allowable u/s 36(1) (vii) or 37(1). Reference is made to Para 5.2 to 5.2.3 of the order of Ld. CIT(A) wherein the addition was deleted. The Ld. CIT(A), after referring to the provisions of CGST Act 2017 held that the assessee was duty bound to pay the GST which was not paid by his suppliers pertaining to FY 2018-19. Accordingly, the assessee correctly claimed the GST payment of Rs.12,38,488/ as an expense.

3 Ground No.3-Alleged Bogus Purchases - Rs.5,07,64,711/- In this regard reference is made to Para 5.4 to 5.4.4 of the order of Ld. CIT(A) wherein the addition was restricted to Rs.4,26,423/-. The assessee had furnished complete evidence of genuineness tax invoices, E-way bills, stock register, GSTR-2A extracts, toll receipts, and banking proofs all of which were accepted during appellate proceedings before Ld. CIT(A) and placed on record, referred to during the course of arguments before ITAT. The Assessing Officer did not reject the books of account, did not dispute the sales and the stock register was accepted. It is now settled law that when both purchases and corresponding sales stand accepted and the quantitative tally is not disturbed, no addition towards "gross profit element" or any percentage of purchase can be sustained merely because some suppliers could not be traced. The assessee relied upon juri ictional Chandigarh ITAT decisions and several other courts, placed in the case law compilation running into 113 pages holding that no GP addition is called for in such circumstances, inter alia: These decisions uniformly hold that where sales are accepted, stock is verifiable, and books are not rejected, no addition is warranted either in full or by applying a GP rate. Following these precedents, the Ld. CIT(A) rightly held that even the nominal GP element of 0.84% was conservative, and in fact, no addition was called for at all.

4 Ground No.4 : In this regard, Ld. AR submitted that purchase difference of Rs.1,23,82,913/-on the basis of purchases shown by the assessee at Rs.41,92,68,077/- whereas as per the GST data, purchases of the assessee were of Rs.40,68,62.366/-. Reference is made to Para 5.5 to 5.5.2 of the order of Ld. CIT(A) wherein the addition was deleted on the basis of complete reconciliation filed during the course of assessment, referred to by the AO in his order as well as proceedings before CIT(A). The assessing officer compared purchase figures excluding GST with purchase figures including GST which is appearing in the ledger account of the supplier party. The Assessee submitted a chart showing reconciliation of the amount as per the purchase ledger of the appellant added figure reported by supplier parties. Copies of the ledger accounts of suppliers in respect of whom information was gathered by the assessing officer was completely reconciled with the ledgers maintained in the books of the Assessee.

We have heard the rival contention of both the parties and perused the material available on the record.

1 Ground No. 1 – Addition of Rs.24,82,734/- u/s 68 Regarding this ground of appeal we find that the Assessing Officer had invoked section 68 in respect of opening balances of M/s K.C. Soni & Sons Steels Pvt. Ltd. and M/s Steel Sales. The Ld. CIT(A) noted that no credit was introduced during the year, and the balances were carried forward from the preceding year. The assessee had written off the outstanding in FY 2022-23 and offered the same to tax in A.Y. 2023-24. In our considered opinion, once no sum is found credited in the books in the relevant previous year, section 68 cannot be invoked. The Ld. CIT(A) rightly followed Sanjay Mehta v. ACIT (ITAT Kolkata) and PCIT v. Topline Buildtech (P) Ltd. (Delhi HC). We find no infirmity in this conclusion, therefore this ground of appeal is dismissed.

2 Ground No. 2 – Disallowance of GST expense Rs.12,38,488/- In this ground we find that the Assessing Officer disallowed the amount treating it as liability of others. The Ld. CIT(A) found that the assessee had deposited GST under statutory compulsion where suppliers failed to remit the collected tax, and the right to claim ITC had lapsed. The liability crystallized during the relevant year and was allowable either as bad debt u/s 36(1) (vii) or as business expenditure u/s 37(1). The Ld. CIT(A) relied upon Pr. CIT v. Khyati Realtors Pvt. Ltd. (SC, 2022) wherein similar business expenditure was held allowable. We concur that the payment was in the course of business and not capital or personal in nature. Therefore this ground of appeal is dismissed.

3 Ground No. 3 – Addition on account of unverifiable purchases Rs.5,07,64,711/- Regarding this ground of appeal we find that the Assessing Officer treated purchases as bogus solely because suppliers were untraceable. The Ld. CIT(A) noted that books were audited, not rejected u/s 145(3), and sales were accepted. All payments were made through banking channels and purchases were supported by invoices, E-way bills, and GST returns which have been placed in the voluminous paper book filed by the assessee and referred to during the course of hearing. The Ld. CIT(A), following Pr. CIT v. Mohammad Haji Adam & Co. (Bom HC), Pr. CIT v. Sunil Mittal HUF (Guj HC), Tejua Rohit Kumar Kapadia (Guj HC), and ACIT v. Vardhman Steel Rolling Mills (Chd ITAT), restricted the addition only to the extent of average GP @ 0.84%, being Rs.4,26,423. Before us, the Revenue could not controvert the factual finding that sales were accepted and stock tally maintained. The assessee, on the other hand, relied upon a series of decisions of juri ictional ITAT Chandigarh and other High Courts including Gaurav Singhi v. ITO (ITA 889/Chd/2024), Prime Steel Industries Pvt. Ltd. v. DCIT (174 Taxmann.com 547), DCIT v. Malbros International Pvt. Ltd. (ITA 992 & 993/Chd/2024), and CIT v. Nikunj Eximp Enterprises (372 ITR 619 Bom) — holding that when books are not rejected and sales accepted, no addition on account of GP is called for.

4 Ground No. 4 Addition of Rs.1,23,82,913/- on account of difference in purchases In this regard, the Ld. CIT(A) found that the AO had compared net purchase values (excluding GST) with gross ledger figures (including GST and opening balances), leading to an artificial difference. Complete reconciliation supported by invoices and bank payments was filed. Books were not rejected. The finding of factual miscomparison remains unrebutted. We therefore find no infirmity in the deletion of this addition. Accordingly this ground of appeal is dismissed.

In the result, appeal of the Revenue is dismissed. Order pronounced in the open Court on 27/11/2025. ललित कुमार (LALIET KUMAR) न्यायिक सदस्य /JUDICIAL MEMBER कृणवन्त सहाय (KRINWANT SAHAY) लेखा सदस्य / ACCOUNTANT MEMBER AG आदेश की प्रतिलिपि अग्रेषित /