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Facts
The assessee, a partnership firm, filed its return declaring Nil income after claiming a Section 80IA deduction. The Assessing Officer (AO) made additions under Section 68 and Section 41(1) of the Income Tax Act, 1961, totaling Rs. 1,18,18,817/- and Rs. 1,66,03,454/- respectively. The CIT(A) partly allowed the appeal.
Held
The Tribunal held that the differences in sundry creditor balances were due to timing mismatches caused by the pandemic and were duly reconciled, thus not warranting additions under Section 68 or Section 41(1). Furthermore, the assessee's claim for deduction under Section 80IA was also considered allowable.
Key Issues
Whether additions made under Section 68 and Section 41(1) for differences in sundry creditors' balances are sustainable when supported by reconciliations, and whether the assessee is entitled to the full deduction under Section 80IA.
Sections Cited
250, 68, 41(1), 115JC, 143(3), 144B, 80IA, 46A
AI-generated summary — verify with the full judgment below
Order PER KRINWANT SAHAY, A.M: This is an apepal filed by the Assessee against the order of the Ld. CIT(A)/NFAC, Delhi dt. 05/06/2024 pertaining to Assessment Year 2020-21.
In the present appeal Assessee has raised the following grounds: 1. That order passed u/s 250 of the Income Tax Act, 1961 by the Learned Commissioner of Income Tax (Appeals), NFAC, Delhi is against law and facts on the file in as much as he was not justified to uphold the addition at Rs. 1,18,18,817/- made by the Learned Assessing Officer by resort to provisions of Section 68 of the Act on account of alleged difference in balances of accounts of sundry
1. creditors as appearing in the books of accounts of the appellant viz-à-viz as appearing in the books of the sundry creditors.
2. That Learned CIT (Appeals) further gravely erred in upholding the addition made at Rs. 1,66,03,454/-by resort to the provisions of Section 41(1) by the Learned Assessing Officer by upholding that some liability is not reflected in the ledger accounts of the appellant whereas the Learned CIT(A) failed to appreciate the impact of the reconciliation made between the accounts.
3. Briefly, the facts of the case are that the assessee is a partnership firm engaged in the business of trading in export of engineering goods, rice and other merchandise. Return of income for A/Y 2020-21 was filed on 12.02.2021 declaring income at Nil after claiming deduction u/s 80IA at Rs. 12,81,92,907/-. However, the tax was paid as per provisions of Section 115JC -alternate minimum tax at an Income of Rs. 12,81,92,907/- The assessment was framed by National Faceless Assessment Centre, Delhi at a total income of Rs. 2,84,22,271/- u/s 143(3) r.w.s. 144B of the Income Tax Act, 1961 vide order dated 19.09.2022. While framing assessment, following additions were made by the Learned Assessing Officer: - a) Addition of Rs. 1,18,18,817/- u/s 68 on account of difference where balances of sundry creditors are more as compared to the balances shown by sundry creditors in their accounts. b) Addition u/s 41(1) of the Income Tax Act, 1961 of Rs. 1,66,03,454/- on account of outstanding balances in sundry creditors are less as reflected in the balances shown by parties in their accounts.
3.1 The assessee submitted complete reconciliations with copies of accounts of all the parties duly justifying the difference in balances shown by the assessee as well as by the parties along with confirmations.
Against the order of the Ld. AO the assessee went in appeal before the Ld. CIT(A). During first appellate proceedings, similar details were submitted before the Ld. CIT(A). The Ld. CIT(A), while deciding appeal of the assessee vide order dated 05.06.2024, has wrongly observed that the details submitted are not produced before the Learned Assessing Officer. Thus, these are the additional evidences for which no application for admitting additional evidence as required by the Rule 46A of Income Tax Rules, 1962, has been filed. Thereby the additions made in the assessment were upheld by him. The submissions of the assessee were that due to out- break of the pandemic in March 2020, certain bills/cheques remained uncleared/entered in the books of accounts which were cleared in the Month of May that is why, there were reconciliations. The same were submitted before the Learned Assessing Officer in response to show-cause notice and also similar details were submitted before the Ld. CIT(A). After considering all the submissions and documents the CIT(A) partly allowed the appeal of the Assessee.
Against the order of the Ld. CIT(A) assessee came in appeal before us.
During the course of hearing, the assessee had submitted paper book containing 252 pages wherein copies of show-cause notice, replies submitted and also written submissions made before the Ld. CIT(A) were filed which interalia includes copies of accounts of the parties as appearing in the books of accounts of the assessee and their confirmed copies of accounts along with reconciliation. The assessee also filed a summary of the reconciliation giving the nature of difference and reference of the page of paper book.
6.1 “Perusal of the chart will reveal that actually there was no difference after reconciliation. There are no payment or receipts which are not reflected in books of accounts. Thus, it is respectfully submitted that the additions made by the Ld. AO and upheld by the Ld. CIT(A) neither falls within the ambit of section 68 or under section 41(1) of the Act. It was demonstrated that there are no new credits which can be said to be unexplained which would attract section 68 not there is any extinguishment of liability which would attract section 41(1) of the Act. Keeping in view facts and circumstances of the case and the detailed submissions made, it is prayed that the addition of Rs. 1,18,18,817/- and Rs. 1,66,03,454/- may kindly be deleted”.
6.2 One of the grounds of the assessee before the Learned Ld. CIT(A) was that "the NFAC gravely erred in computing additional tax liability by not allowing the claim of deduction u/s 80IA claim allowable by the assessee was Rs. 13,61,30,458/- as per Form 10CCB filed along with return, but claim of Rs. 12,81,92,907/- to the extent taxable profit." This ground of the assessee was also dismissed by merely mentioning that there is no discussion in the body of the assessment order with regard to the claim of addition u/s 80IA of the Act. However factually position is that by making addition in the assessment order, the income of the assessee has increased to that extent whereas the assessee had claimed deduction to the extent of Rs. 12,81,92,907/- which was otherwise available to it at Rs. 13,61,30,458/- as per Form 10CCB uploaded by the Auditors of the assessee. Meaning thereby in case the additions are being upheld, the assessee is entitled to the deduction to the extent of Rs. 13,61,30,458/-not as claimed at Rs. 12,81,92,907/-.
Per contra, the Ld. DR relied on the order of the lower authorities.
We have heard the rival contention and perused the material available on the record.
8.1 Regarding the issue of addition of Rs. 1,18,18,817/- we noticed that the addition was made by the Ld. AO under Section 68 on account of alleged differences in the balances of sundry creditors as per the assessee’s books vis-à-vis the creditors’ books. The assessee submitted detailed reconciliations, supported by copies of accounts and confirmations from the respective parties, both before the AO and the Ld. CIT(A). The reconciliation chart clearly demonstrates that the differences arose due to timing issues caused by the outbreak of the pandemic in March 2020, which led to delays in clearing bills/cheques, subsequently regularized in May 2020. Upon perusal, we find that the reconciliations provided by the assessee fully account for the differences, and there are no unexplained credits in the books of the assessee that would warrant an addition under Section 68. The Ld. CIT(A) erred in dismissing the reconciliations as additional evidence under Rule 46A of the Income Tax Rules, 1962, without appreciating that similar details were submitted before the AO in response to the show-cause notice. The addition under Section 68 is not sustainable as no new credits were found to be unexplained. Accordingly, the addition of Rs. 1,18,18,817/- is deleted.
8.2 Regarding the issue of addition of Rs. 1,66,03,454/- under Section 41(1), alleging that certain liabilities were not reflected in the assessee’s ledger accounts compared to the balances shown by the creditors. The assessee provided reconciliations and confirmations, which demonstrate that there was no cessation or extinguishment of liability. The differences were due to timing mismatches, duly explained and supported by documentary evidence.
8.3 We observe that Section 41(1) applies only when a liability ceases to exist, resulting in a benefit to the assessee. In the present case, the reconciliations confirm that all liabilities are duly recorded and accounted for, with no evidence of cessation. The Ld. CIT(A) failed to appreciate the reconciliations and wrongly upheld the addition. As no liability was extinguished, the addition under Section 41(1) is not justified and is hereby deleted.
8.4 Regarding the issue of “ the NFAC gravely erred in computing additional tax liability by not allowing the claim of deduction u/s 80IA claim allowable to the assessee was Rs. 13,61,30,458/- as per Form 10CCB filed along with return, but claim of Rs. 12,81,92,907/- to the extent taxable profit”
8.5 In this regard we noticed that the assessee claimed a deduction of Rs. 12,81,92,907/- under Section 80IA, supported by Form 10CCB, which certified eligibility for a deduction of Rs. 13,61,30,458/-. The AO, while framing the assessment, did not specifically disallow the deduction but increased the taxable income by the additions under Sections 68 and 41(1). The Ld. CIT(A) dismissed this ground, noting no discussion on Section 80IA in the assessment order. However, since the additions under Sections 68 and 41(1) have been deleted, the assessee’s claim under Section 80IA to the extent of Rs. 12,81,92,907/-, as claimed in the return, remains allowable. Further, the assessee is entitled to claim the deduction up to Rs. 13,61,30,458/- as per Form 10CCB, subject to the taxable profit for the year.
In the result, appeal of the Assessee is allowed.
Order pronounced in the open Court on 09/06/2025.