NIDHI RANI,PANIPAT vs. INCOME TAX OFFICE, WARD-1, PANIPAT, PANIPAT

That having regard to the facts and circumstances of the case, the assumption of jurisdiction is bad in law, illegal and void ab-initio inter alia for the reason that the impugned assessment order has been passed without following the provisions of section 143(3A) & 143(3B) of Income Tax Act, 1961.

That having regard to the facts and circumstances of the case, Ld. CIT(A) has erred in law and on facts in not reversing the action of Ld. AO in charging interest u/s 234A, 234B and 234C of Income Tax Act, 1961.

That the appellant craves the leave to add, modify, amend or delete any of the grounds of appeal at the time of hearing and all the above grounds are without prejudice to each other.”

Ground of appeal Nos. 1 & 2 raised by the assessee are in relation to the addition of INR 1,57,97,722/- made towards unsecured loans taken from Tejas Handloom u/s 68 of the Act by holding the same as unexplained.

On the other hand, Ld. Sr. DR vehemently supported the orders of the lower authorities and submits that it was the claim of the assessee that there is a regular business transaction between two parties however, from the perusal of the ledger account, it could be seen that except transfer of funds, there is no business transactions between them nor any evidences were filed to establish that transactions were under business exigencies. Ld. Sr. DR further submits that merely filing the bank statements and copy of ITR, it is not absolved the assessee from the onus to establish the creditworthiness of the lender. He thus prayed that the addition made deserves to be uphold. Regarding peak credit theory, Ld. Sr. DR submits that working of the peak credit submitted by the assessee suffers deficiency opening balance was not included in the same, therefore, the peak balance of INR 24,30,000/- is incorrect. He prayed accordingly.

Heard the contentions of both parties and perused the material available on record. In the instant case, the sole allegation of the AO is regarding failure on the part of the assessee to prove the creditworthiness/capacity of lender M/s Tejas Handloom to provide funds to the assessee. The AO observed that M/s Tejas Handloom shown income of INR 10,67,933/- and its capital was only INR 19,61,924/- therefore, sufficient funds were not available with it to extend loan to the tune of INR 1,57,59,722/- to the assessee during the year under appeal.

The provisions as contained in u/s 68 of the Act reads as under:- Cash credits. 68. “Where any sum is found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the sum so credited may be charged to income-tax as the income of the assessee of that previous year : Provided that where the sum so credited consists of loan or borrowing or any such amount, by whatever name called, any explanation offered by such assessee shall be deemed to be not satisfactory, unless,— (a) the person in whose name such credit is recorded in the books of such assessee also offers an explanation about the nature and source of such sum so credited; and (b) such explanation in the opinion of the Assessing Officer aforesaid has been found to be satisfactory: Provided further that where the assessee is a company (not being a company in which the public are substantially interested), and the sum so credited consists of share application money, share capital, share Page | 7

As per section 68, onus is on the assessee to establish the three ingredients i.e. (i) identity of the creditors; (ii) genuineness of the transactions; and (iii) creditworthiness of the lender.

In the instant case, assessee had filed copy of Aadhar of Karta of lender HUF, its PAN and ITR thus, the identity has been established which was also not doubted. Since all the transactions were caried out through banking channel, therefore, genuineness also established.

It is also relevant to state that amendment in section 68 was made vide Finance Act, 2022 wherein second proviso was inserted, so as to provide that the nature and source of any sum, whether in the form of loan or borrowing, or any other liability credited in the books of an assessee shall be treated as explained only if the source of funds is also explained in the hands of the creditor or entry provider. This amendment has taken effect from 1st April, 2023 and accordingly applies in relation to the assessment year 2023-24 and all subsequent assessment years. The year before us is AY 2018-19 thus this amendment is not applicable in the present case.

The coordinate Bench of Delhi bench of Tribunal in the case of ACIT v Smt. Prem Anand in vide order dated 13.04.2017 held that amendment made in section 68 of the Act w.e.f. 01.04.2013 empowers the A.O. to examine source of source in case of share application money / share capital / share premium and thus this amendment does not give power to the A.O. to examine source of source of non-share capital cases.

The Hon’ble Allahabad High Court in the case of PCIT vs. Anshika Consultants (P.) Ltd. [2024] 162 reported in taxmann.com 792 (Allahabad) held as under:-

In the case of DCIT vs. Paswara Papers Ltd. reported in [2024] 159 taxmann.com 604 (Allahabad), the Hon’ble High Court held as under: “Where assessee received loan from various creditors who sold their old jewellery and gave loan to assessee out of sale consideration, since assessee had disclosed name of jewellers to whom jewellery was sold Page | 10

The Hon’ble Delhi High Court in the case of CIT vs Vrindavan Farms Pvt. Ltd. in of 2015 dated 12.08.2015 has held as under:- "The sole basis for the Revenue to doubt their creditworthiness was the low income as reflected in their return of income. lt was observed by the ITAT that the Assessing Officer had not undertaken any investigation of the veracity of the documents submitted by the assessee, the departmental appeal was dismissed by the Hon’ble High court.”

The Hon'ble Delhi High Court in the case of PCIT vs. Agson Global Pvt. Ltd reported in [2022]134 Taxmann.com 256 (Delhi) while allowing the appeal in favour of the assessee towards the additions made u/s 68 of the Act has held as under:

On the issue of discharge the onus of establishing the creditworthiness of the loan creditor, the Hon'ble Delhi High court in the case of Mod. Creations (P.) Ltd. v. ITO reported in [2013] 354 ITR 282, has held as under: "It will have to be kept in mind that Section 68 of the I.T. Act only sets up a presumption against the Assessee whenever unexplained credits are found in the books of accounts of the Assessee. It cannot but be gainsaid that the presumption is rebuttable. In refuting the presumption raised, the initial burden is on the Assessee. This burden, which is placed on the Assessee, shifts as soon as the Assessee establishes the authenticity of transactions as executed between the Assessee and its creditors. It is no part of the Assessee's burden to prove either the genuineness of the transactions executed between the creditors and the sub-creditors nor is it the burden of the Assessee to prove the creditworthiness of the sub-creditors.

It was further observed by the Hon’ble Court as under:

One more aspect needs to be considered is that the entire loan was repaid during the year itself which includes the opening outstanding balance and the same stands accepted by the AO. Eventually, such repayment of funds by the assessee became the source of funds in the hands of M/s Tejas Handloom for making fresh loan to the assessee. This fact is further established from the funds flow statement prepared for peak balance, as discussed above.

The Hon'ble Gujarat High Court in the cases of PCIT vs Ojas Tarmake (P).Ltd. [2023] 156 taxmann.com 75, CIT Vs. Ayachi Chandrasekhar Narsangji, 42 Taxmann.com 251 (Guj) and CIT Vs. Mahavir Crimpers, 95 Taxman.com 323 (Guj) held that when the Department has accepted the factum of repayment, the additions under Section 68 is not sustainable in law. Similar view has been expressed by the jurisdictional high court in the case of CIT Vs. Karaj Singh (2011) 15 Taxmann.com 70 (P&H).

In view of the above discussion and considering the fact that the assessee has been able to demonstrate that funds given by M/s Tejas Handloom are majorly sourced out of the loan repaid by the assessee herself which payment has not been doubted and, therefore, no addition could be made u/s 68 of the Act. Accordingly, we hereby direct the AO to delete the addition of INR 1,56,59,722/- made u/s 68 of the Act. Grounds of appeal Nos. 1 & 2 raised by the assessee are thus allowed.

Now coming to Grounds of appeal Nos.3 & 4 raised by the assessee against the application of G.P. rate of 1.22 % on the gross turnover of the assessee.

Before us, Ld. AR of the assessee submits that AO has doubted the books of accounts for two reasons:-

Before us, Ld.AR for the assessee submits that without invoking the provision of section 145(3) of the Act, estimation of income is not permissible. Ld.AR submits that AO has made a serious error of fact by applying average rate of G.P. on all the items traded during the year to work out the cost of goods sold. He submits that assessee is dealing into different items which are 92 in number as could be seen from the index of items of stock register placed at pages 186 & 187 of the Paper Book. Ld. AR further submits that G.P. rate cannot be remained static for each and every item traded that too on daily basis, as has been assumed by the AO while working out of monthly position of closing stock for making allegation that there was negative stock. Ld.AR submits that assessee has filed complete copy of stock register containing item-wise quantity of opening stock, purchase made alongwith daily balancing of each individual item traded, consequent sales and daily balance of the quantity available alongwith value thereof. The stock register so submitted before the AO is filed before us at page 40 to 185 of the Paper Book. Ld.AR submits that though all these stock records were not produced before the Auditors however, they were produced before the AO who has failed to point out a single defect in any of the entries contained in the stock register which are further supported by respective purchases and sales bills alongwith quantitative tally. Ld. AR submits that merely on the observations of the Auditor that he has not verified the stock record, trading results cannot be doubted on assumptions and presumptions. With respect to the application of G.P. rate of 1.22 %, Ld.AR submits that assessee is having irregular G.P. rate ranging from 0.62% to 0.13% starting from AYs 2014-15 to 2018-19 i.e. year under appeal and the AO has failed to consider Page | 15 such variation in the G.P. rate which has not been doubted in any of the preceding year. Ld. AR also stated that turnover of the assessee had increased multi-fold from INR 8.02 crores in FY 2014-15 to INR 308.94 crores in the year under appeal which cannot be achieved without reducing the profit margins. He, therefore, requested that the additions made deserves to be deleted. Reliance is placed on the judgement of Hon’ble Punjab High Court in the case of Pandit Pros. Vs CIT [1954] 26 ITR 159 (Punjab) and the decision of Co-ordinate Bench of Delhi Tribunal in the case of Agson Global P.Ltd. [2020] 115 taxmann.com 342 (Del.Trib.).

On the other hand, Ld. Sr. DR for the Revenue vehemently supported the orders of lower authorities and submits that assessee has failed to controvert the findings of AO before Ld. CIT(A) or at this stage before us. He submits that AO has worked out the monthly position of stock based on the figures supplied by the assessee and therefore, he requested to confirm the additions so made.

Heard the contentions of both parties and perused the material available on record. In the instant case, allegation of the Revenue is that assessee is not maintaining proper stock records and as per the AO, there was negative stock in two months whereas claim of the assessee is that day to day stock register was maintained and submitted before the lower authorities for verification however, the same was ignored while rejecting the books of accounts and profits were estimated.

On perusal of the facts and circumstances of the case and stock records filed in the paper book, we find that assessee was maintaining day to day stock register containing inward and outward of goods on daily basis and the AO has failed to point out any specific defect in any of the entries contained therein. From the perusal of chart as provided at page 8 of the assessment order where the AO has worked out the deficiency of stock in two months, we find that AO has calculated the stock position in terms of value and has failed to point out any error in the quantitative tally submitted by the assessee. The value of each item traded may differ and cannot be taken as basis for computing the stock position more particularly when the quantitative details are available. Further value of each item depends upon the G.P. rate of each individual item however, it would not impact the day to day quantity traded by the assessee which fact has been ignored by the assessee. From the perusal of the stock inventory available in the paper book filed by the assessee, we find that there was no deficiency in quantitative terms therefore, we are not in agreement with the observations of the AO that the books of accounts of the assessee does not depict true & fair view of the transaction carried out by the assessee.

The Hon’ble Kerala High Court in the case St. Teresa’s Oil Mills vs State of Kerala [1970] 76 ITR 365 has held as under:-

It is further seen that assessee has traded in different type of products which are more than 92 products and it is settled proposition that the G.P. rate cannot remain static for different item. This fact is also ignored by the AO while doubting the trading results. When the assessee has successfully demonstrated that it had no negative stock on daily basis in terms of the quantity, allegation of the AO of deficiency in stock cannot be accepted. Besides this, the AO has not identified any specific instance defect in the books of accounts maintained by the assessee nor in the stock records. Therefore, we do not find any reason to disbelieve the books of accounts maintained by the assessee in regular course which are duly audited by the statutory Auditors. Therefore, we hold that the books of accounts of the assessee cannot be rejected by invoking the provision of section 145(3) of the Act.

With respect to the application of G.P. rate of 1.22%, we find that the AO has applied G.P. rate of immediately preceding year where the turnover of the assessee was of INR 40.87 crores as compared to INR 308.94 crores in the year under appeal. It is the settled principle of business that higher turnover could be achieved by lowering the profit margins. In the instant case, turnover of the assessee increased multi-fold which fact cannot be ignored by estimating the income.

Looking to the entirety of the facts and circumstances of the case and further considering that we have already held that provisions of section 145(3) cannot be invoked in the present case, G.P. rate declared by the assessee cannot be disturbed. Accordingly, the addition made by applying G.P rate of 1.22% is hereby, deleted. Grounds of appeal No. 3 & 4 raised by the assessee are allowed.

In the result, appeal of the assessee is allowed. Order pronounced in the open Court on 19.12.2025.