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Facts
The Revenue appealed against the CIT(A)'s order deleting an addition of Rs. 5,60,00,000/-. The addition was made by the Assessing Officer (AO) due to an unexplained increase in trade payables, attributing it to a lack of genuine explanation from the assessee despite the COVID-19 pandemic. The assessee explained that the outstanding commission for March 2020 remained unpaid due to office closures caused by the pandemic.
Held
The Tribunal held that the AO's addition was based on surmises and conjectures, without considering the impact of the COVID-19 pandemic and the abnormal business conditions. The CIT(A) had found that balance confirmations were submitted and not disproved, and the AO had not conducted any age-wise analysis of creditors or invoked Section 41(1). The Tribunal found no infirmity in the CIT(A)'s order.
Key Issues
Whether the CIT(A) erred in deleting the addition made on account of unexplained increase in trade payables without sufficient verification.
Sections Cited
143(3), 144B, 250, 41(1)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, “D” BENCH MUMBAI
आदेश / ORDER
PER MAKARAND VASANT MAHADEOKAR, AM:
This appeal is filed by the Revenue against the order dated 18.09.2025 passed by the Commissioner of Income-tax (Appeals), National Faceless Appeal Centre, Delhi [hereinafter referred to as “CIT(A)”] under section 250 of the Income-tax Act, 1961 [hereinafter referred to as “the Act”]for the Assessment Year Quality Application Solution 2020-21 arising out of assessment framed by the Assessing Officer vide order dated 12.09.2022 passed under section 143(3) read with section 144B of the Act. Facts of the Case 2. The assessee is a resident company engaged in the business of advocacy and marketing of various services and acts as a direct marketing agent for services such as Insurance, DTH, Credit Cards and also signs up donors for reputed charities, NGOs and trusts, earning commission at predetermined rates.
The assessee filed its return of income declaring total income of Rs. 19,39,75,680/-. The case was selected for complete scrutiny under CASS for the reasons: i. Low turnover in comparison to outward foreign remittance; ii. Foreign remittance made to persons located in low tax jurisdiction countries.
During the course of assessment, the Assessing Officer observed that trade payables had increased from Rs. 1,44,42,556/- as on 31.03.2019 to Rs. 9,34,05,750/- as on 31.03.2020.The assessee was required to furnish details of sundry creditors and other liabilities, ledger accounts, confirmations from parties, and reasons for non-payment and increase. The assessee explained that commission for March 2020 amounting to Rs. 8,55,27,765/- remained unpaid due to closure of offices on account of COVID-19 from 22.03.2020. It Quality Application Solution was further explained that total trade payables as on 31.03.2020 comprised commission payable to marketing companies of Rs. 9,10,30,668/- and other payables of Rs. 23,75,082/-, and that the outstanding pertained only to expenses booked during the year and none related to prior years.
However, the Assessing Officer rejected the explanation. The Assessing Officer recorded that turnover increased from Rs. 84 crores to Rs. 109 crores, trade receivables decreased from Rs. 7.65 crores to Rs. 4.95 crores, and trade payables increased from Rs. 1.44 crores to Rs. 9.34 crores. The Assessing Officer held that if receivables had decreased, funds were collected and therefore the explanation of inability to pay due to COVID was not acceptable. The Assessing Officer computed the ratio of trade payables to turnover in the previous year at 0.017 and applied the same to turnover of Rs. 109 crores to arrive at permissible trade payables of Rs. 1.87 crores. Even assuming doubling due to COVID, he considered Rs. 3.74 crores as reasonable and treated the balance of Rs. 5.60 crores as income. Accordingly, Rs. 5,60,00,000/- was added to total income.
The assessee preferred appeal before the CIT(A). Before CIT(A) the assessee reiterated that during the relevant year it had earned commission income of Rs. 1,09,32,79,235/- and had in turn paid commission of Rs. 79,15,48,238/- to various marketing companies for promoting its activities. It was submitted that month-wise details of commission earned and commission paid had been furnished before the Assessing Officer. The appellant Quality Application Solution further pointed out that the outstanding commission for the month of March 2020 amounted to Rs. 8,55,27,765/- and that the total trade payables as on 31.03.2020 stood at Rs. 9,34,05,750/-. It was submitted that balance confirmations from various commission agents as on 31.03.2020 were furnished, and that the outstanding amounts were subsequently paid after the lockdown period. The assessee asserted that the Assessing Officer had resorted to “mathematical jugglery” by presuming that trade payables could not exceed twice the earlier ratio and had disallowed Rs. 5,60,00,000/- without identifying any specific creditor or conducting any age-wise analysis of the outstanding liabilities.
The CIT(A) held that the Assessing Officer had made the addition purely on surmises and conjectures by resorting to mathematical calculation without any substantive basis. It was observed that the COVID period and the abnormal business conditions prevailing during that time were not properly considered by the Assessing Officer. The CIT(A) further noted that balance confirmations from the creditors had been submitted and were not disproved. It was also observed that the Assessing Officer had not examined whether the provisions of section 41(1) were applicable and had not undertaken any age-wise analysis of the creditors. The CIT(A) recorded that the Assessing Officer had arbitrarily allowed Rs. 3,74,00,000/- and disallowed Rs. 5,60,00,000/- without identifying the name, nature or age of any
Aggrieved by the order of CIT(A), the Revenue is in appeal before us raising following grounds of appeal:
i. Whether the Learned CIT(A) erred in law and on facts in deleting the addition of ₹5,60,00,000 made towards unexplained increase in trade payables merely on the basis of explanation and confirmations filed by the assessee, without verifying the authenticity of the creditors or the actual payment thereof. ii. The appellant craves leave to add, alter, amend or delete all or any of the aforesaid grounds of appeal
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9. The learned Departmental Representative strongly relied upon the assessment order. He drew our attention to para 3.1(v) of the assessment order and submitted that there was abnormal increase in trade payables and receivables had reduced substantially. It was also submitted that no proper evidence of actual payment was verified by the CIT(A) and the deletion was granted merely on the basis of confirmations without independent verification. He submitted that the order of the Assessing Officer deserves to be restored.
The learned Authorised Representative relied upon the order of the CIT(A) and submitted that the commission payable was subsequently paid.
We have carefully considered the rival submissions and perused the material available on record. It is an undisputed position that the trade payables as on 31.03.2020 stood at Rs.
Quality Application Solution 9,34,05,750/-, out of which commission payable to marketing companies amounted to Rs. 9,10,30,668/-, and the commission pertaining to the month of March 2020 alone was Rs. 8,55,27,765/-. It is also a matter of record that the relevant period coincided with the nationwide lockdown imposed on account of COVID-19.
From the assessment order, it is evident that the Assessing Officer has not disputed that commission was payable, nor has he disputed that such expenditure was claimed and otherwise accepted. It is also not in dispute that details of recipients were furnished during the course of assessment proceedings, as recorded in earlier paragraphs of the assessment order.
The addition in question has not been made by invoking the provisions of section 41(1) of the Act. There is no finding by the Assessing Officer that the liability had ceased to exist. There is also no finding that any particular creditor was non-existent or fictitious. The addition has been made purely on the basis of comparative ratio analysis and an assumption that trade payables cannot exceed a particular percentage of turnover.
In our considered view, such an approach cannot take the place of examination of individual liabilities. Estimation of a permissible ceiling of trade payables without identifying any specific bogus or non-genuine entry lacks legal foundation. The CIT(A) has recorded that confirmations were furnished by the assessee and were not rebutted by the Assessing Officer. The Revenue has not placed on record any material to demonstrate
The reliance placed by the learned Departmental Representative on para 3.1(v) of the assessment order does not bring forth any concrete material to establish that the liabilities represented income of the assessee. When liabilities are reflected in the books of account and no material is brought on record to establish that they are fictitious, ceased or otherwise not genuine, an addition cannot be sustained merely on suspicion or on the basis of ratio comparison.
The conclusion recorded by the Commissioner (Appeals) reads as under:
“2. AO has made addition in this case completely on the basis of surmises and conjectures, by doing mathematical calculation. AO has completely ignored that it was covid period and almost all businesses were either closed or going through abnormal and turbulent times. AO, has, during assessment proceeding has not properly considered the submissions made by assessee, clearly avoiding the facts related to covid situation and balance confirmation submitted by assessee from various creditors, and made addition of Rs.5,60,00,000/- by simply stating that even if it is covid time, trade payable ratio cannot be more than twice. AO has not submitted any documentary evidence in support of this theory. There is no logic as even why this liberty of taking trade payable ratio as twice has been taken by AO. It is a fact that assessee is not a first timer business man and is regularly engaged in same nature of business since long. Further, AO has nowhere prove that whether that these balance trade payables are covered u/s.41(1) or not and there was no comment regarding their genuineness or non- genuineness. AO has no documentary evidences to disprove documentary proof submitted by assessee. It is not the case that these trade payables remain unpaid since long time, as AO has not even done age wise analysis of creditors. AO, has simply on the basis of some Quality Application Solution surmises and conjectures, without any backing of any documentary evidences and on the basis of his own cooked theory, allowed Rs.3,74,00,000/ worth trade payables and disallowedRs.5,60,00,000/- worth trade payables, without identifying the name, nature and age i.e since how long they are unpaid and other details of creditors. It clearly shows that AO has applied wrong theory and on wrong application of mind, made wrong addition of Rs.5,60,00,000/. Accordingly, AO is directed to delete this addition and give relief to the assessee.” (page 8) 17. In the absence of any cogent material brought by the Assessing Officer to establish that the trade payables were not genuine, we find no infirmity in the order of the CIT(A).We, therefore, uphold the order of the Commissioner (Appeals) deleting the addition of Rs. 5,60,00,000/-.The ground raised by the Revenue is dismissed.
In the result, the appeal of the Revenue is dismissed.
Order pronounced in the open court on 20.02.2026.