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Judgment
PER VIMAL KUMAR, JM:
The application for condonation of delay of 8 days in filing appeal and the appeal filed by the Revenue are against order dated 16.09.2025 of the Ld. Commissioner of Income Tax (Appeals)/NFAC, New Delhi [hereinafter referred to as “the CIT(A)”] under section 250 of the Income Tax Act, 1961 (hereinafter referred to as “the Act”) arising out of assessment order dated 11.12.2018 of the Learned Assessing Officer / ACIT, Central Circle-7(1), New Delhi (hereinafter referred to as “the AO”) u/s 143(3) of the Act for A.Y. 2016-17.
Brief facts of the case are that on 15.10.2016 the assessee filed return of income of Rs. 51,70,68,180/-. The assessee filed his revised return on 31.03.2017 declaring income of Rs. 52,39,14,040/-. The case was selected for complete scrutiny assessment under CASS. Notice u/s 143(2) of the act was issued. Notices u/s 142(1) of the Act dated 12.11.2018 and 24.12.2018 were issued. During the assessment proceedings, the assessee was asked to submit evidence u/s 68 of the Act in respect of unsecured loan of Rs. 60,97,22,000/- vide notices u/s 142(1) of the act dated 12.11.2018. The assessee has submitted confirmations/ copies of ITR and balance sheet but assessee did not submit copies of bank statements to prove the creditworthiness of these creditors. Notice u/s 133(6) of the act were issued to some of the lenders and in few cases replies were received. On completion of proceedings, ld. AO vide order dated 11.12.2018 made additions of Rs. 44,05,22,000/-, Rs. 6,26,869/-, Rs. 86,00,000/-, 49,07,000/- and Rs. 3,73,98,925/- u/s 68 of the Act is unexplained credits.
Against order dated 11.12.2018 of ld. AO, the assessee filed appeal before Ld. CIT(A) which was allowed vide order dated 16.09.2025.
Being aggrieved, the revenue preferred application for condonation of delay of 8 days in filing appeal and the appeal.
In application of condonation of delay, it is mentioned that there is delay of 8 days in filing appeal due to official work. The explanation for condonation of delay does not smack of mala fides as the assessee has not gained anything by not filing of appeal within period of limitation. Therefore, the delay of 8 days in filing appeal before the Tribunal is condoned.
Ld. Departmental Representative for appellant/revenue submitted that Ld. CIT(A) erred in deleting additions made by ld. AO u/s 40A(2)(b) of the Act without appreciating that the assessee failed to justify the steep increase in Directors’ remuneration during the assessment proceedings. Ld. CIT(A) erred in deleting disallowance of Rs. 49,07,000/- by AO u/s 40A(2)(b) of the act. Ld. CIT(A) erred in deleting addition of Rs. 3,73,98,925/- made by AO on account of suppressed gross profit.
Ld. Authorized Representative for respondent/assessee submitted proof synopsis and written submissions enter alia mentioning:
“A. Ground no.2: Addition amounting to Rs. 44,05,22,000/- under section 68 of the Act
4.At the outset, it is humbly submitted that during the year under consideration, the Assessee had received unsecured loans aggregating to Rs. 44,05,22,000/- from 11 parties. The Ld. AO treated the said loans as unexplained cash credits under section 68 of the Act. However, upon appreciation of the material available on record, the CIT(A) was pleased to delete the impugned addition.
5.In this regard, it is humbly submitted that in order to discharge the onus cast upon an Assessee under section 68 of the Act, the Assessee is required to establish the identity of the creditor, the creditworthiness of the creditor, and the genuineness of the transaction. In the present case, all the three ingredients stand conclusively established.
6.For the assistance of the Hon'ble Bench, the Assessee has annexed a comprehensive chart along with the present synopsis setting out the documents furnished in respect of each lender demonstrating satisfaction of the aforesaid three ingredients.
7.As regards the identity of the lenders, it is submitted that the all the lender companies are duly incorporated entities, regularly assessed to tax, and actively carrying on business activities. The existence and identity of the lenders stood duly verified. Even the CIT(A), while adjudicating the issue, has recorded a finding that the identity of the lenders stands established in Para 16 of the CIT(A) order, page 58.
8.With respect to the creditworthiness of the lenders, it is submitted that the Ld. AO had independently issued notices under section 133(6) of the Act to the lender companies. In response thereto, the lenders furnished confirmations, income tax returns, bank statements, and audited financial statements.
9.The bank statements and audited financial statements furnished by the lenders clearly demonstrate availability of sufficient funds for advancing the loans in question. The Ld. AO has merely alleged in certain cases that the lenders were declaring comparatively low income. However, it is a settled proposition of law that low income, by itself, cannot be a ground to disregard the creditworthiness of a lender. The capacity to advance loans has to be examined with reference to the overall financial position of the lender, including its share capital, reserves and surplus, borrowings, and other available funds.
10.The CIT(A) in Para 11 of the order has categorically held that the creditworthiness of the lenders cannot be decided solely on the basis of quantum of income declared by them in their return of income. The net worth of the lenders and even the availability of funds in their hands in the form of borrowings also should be taken into account. The relevant observation in Para 11 is as under:
"11.I have carefully considered the facts and findings recorded by the AO in the assessment order and the contentions of the appellant. I agree with the appellant that the creditworthiness of the lenders cannot be decided solely on the basis of the quantum of income declared by them in their return of income. The net worth of the lenders and even the availability of funds in their hands in the form of borrowings also should be taken into account. I find that the AO had made independent verification of the claim of the appellant by issuing notices u/s. 133(6) of the Act to the parties concerned. All the creditors have confirmed the transactions with the appellant and the requisite documents such as bank Statements, ITRs and Balance Sheets of the lenders had also been filed before the AO so as to enable her to verify the claim of payments made by them and their creditworthiness. These documents, along with ledger accounts of these parties, have been filed before me also."
11.In this regard, the Assessee had also furnished a detailed chart reflecting the share capital, reserves and surplus, borrowings, and net worth of the lender companies. The said details clearly establish that the lenders possessed adequate financial capacity to advance the loans. (ref Para 13, page 50 of the CIT(A) order).
12.In view of the above, the CIT(A) after a detailed examination of the documentary evidence placed on record in respect of each lender has recorded the findings in detail with respect to creditworthiness of each lender in Para 14, spanning from Page 51-58 of the aforesaid order. The CIT(A) has held that all the above lenders are assessed to tax and had sufficient funds to advance the respective amounts at the relevant point of time. Thus, the creditworthiness of all the creditors stands established.
13.Reliance in this regard is placed on the following judgments of Hon'ble Delhi High Court:
a)CIT v. Value Capital Service (P.) Ltd., [2008] 307 ITR 334 (Delhi), page 142-143 of the case law compilation.
b)CIT v. Vrindavan Farms (P.) Ltd., ITA No. 71-72 & 84 of 2015 dated 12.08.2015, page 144-147 of the case law compilation.
14.As regards the genuineness of the transactions, it is submitted that all the loans were received through proper banking channels and were duly reflected in the regular books of account of both the Assessee and the lenders. Interest on such loans has been regularly paid/credited, tax has been deducted at source thereon, and the same has been duly deposited with the Government.
15.It is pertinent to note that there is no allegation by the Ld. AO that any cash was deposited into the bank accounts of the lenders immediately before advancing the loans to the Assessee. Similarly, there is no finding that the impugned transactions constituted accommodation entries or that the funds advanced by the lenders had emanated from the Assessee itself.
16.In this regard, the findings of the CIT(A) are observed in Para 16 and 17 of the order and the same are as under:
"16.It can be seen from the above that all the creditors are assessed to tax and had sufficient funds to advance the respective amounts at the relevant point of time. Thus, creditworthiness of all the creditors is established. Further, all the lenders are found to be in existence and carrying on business operations. There is no evidence brought on record by the AO that appellant's own money was routed back to it through these creditors. Merely due to the fact that before advancing the loan, there are other credit entries in the bank account, it cannot be concluded that the transaction is not genuine. There is no allegation or finding that the lender companies are indulged into providing any accommodation entries. Therefore, genuineness of the transactions with all the lenders, cannot be doubted.
17.In view of the above discussion, I hold that the appellant has furnished enough documentary evidence to prove the identity and creditworthiness of the lender and to prove the genuineness of the transactions. Further, there is no finding that the lender companies are involved in providing accommodation entries or there are cash deposits in the bank account before advancing the loan. Therefore, the unsecured loan taken from these parties cannot be held as unexplained cash credits us 68 of the Act. Accordingly, addition made of Rs. 44,05,22,000 u/s. 68 of the Act is deleted."
17.Attention in this regard is invited to the judgements placed at S. no 1 to 13 of the case law compilation from page no. 1-141.
18.Without prejudice to the above, it is submitted that for the year under consideration, the Assessee was under no statutory obligation to prove the source of source of the lenders under section 68 of the Act. Reliance in this regard is placed on the judgment of Hon'ble Delhi High Court in the case of Sheela Overseas Pvt. Ltd. v. PCIT, ITA No. 546/2023 dated 28.05.2025 (attached at S. no 16, page 148-158 of the case law compilation).
19.Nevertheless, detailed submissions explaining the source of funds available with the lenders were furnished before the Ld. CIT(A), who, after examining the material on record, accepted the explanation and granted relief to the Assessee.
20.In view of the aforesaid facts and circumstances, it is humbly submitted that the CIT(A) has correctly appreciated the evidences placed on record and deleted the impugned addition. Accordingly, the relief granted by the Ld. CIT(A) deserves to be sustained and the corresponding ground raised by the Revenue is liable to be dismissed.
B. Ground no. 3: Disallowance of Directors' Remuneration amounting to Rs. 86,00,000/-
21.During the year under consideration, the Assessee paid remuneration to its director. The Ld. AO has disallowed an amount of Rs. 86,00,000/- solely on the ground that the remuneration paid during FY 2015-16 was higher than the remuneration paid during FY 2014-15, i.e., the remuneration paid in FY 2014-15 amounted to Rs. 0.66 crore, whereas in FY 2015-16 the same stood at Rs. 1.52 crore.
22.At the outset, it is submitted that the genuineness of the payment has never been doubted by the Ld. AO. The remuneration was duly recorded in the books of account and there is no allegation whatsoever that the expenditure is bogus, sham, fictitious, or incurred for non-business purposes.
23.It is pertinent to note that the Assessee has duly submitted before the Ld. AO that the director is involved in making all strategic and important decisions, hence, there has been increase in remuneration. However, the disallowance has been made merely by comparing the remuneration paid during the year under consideration with that paid in the immediately preceding year. The Hon'ble bench would appreciate the fact that a mere increase in remuneration, by itself, cannot constitute a valid basis for disallowance.
24.It is further submitted that the remuneration paid to the director is a tax-neutral transaction. The recipient director is assessed to tax at the maximum marginal rate and, therefore, no tax advantage or tax evasion is achieved by the Assessee company through payment of such remuneration.
25.Furthermore, the remuneration paid to the director is within the limits prescribed under the provisions of the Companies Act.
26.Without prejudice, it is submitted that even the provisions of section 40A(2)(b) of the Act have not been invoked by the Ld. AO. It is settled law that section 40A(2) empowers the AO to disallow expenditure incurred in favour of specified persons only where such expenditure is found to be excessive or unreasonable having regard to:
(a)the fair market value of the goods, services, or facilities;
(b)the legitimate needs of the business; and
(c)the benefit derived by or accruing to the Assessee.
27.However, the formation of such opinion must be based upon objective material, cogent evidence, and proper enquiry. In the present case, the Ld. AO has not brought on record any comparable instance, market data, or independent material to establish that the remuneration paid to the director was excessive or unreasonable.
28.No enquiry or verification has been conducted from any third party. The Ld. AO has failed to point out even a single instance demonstrating that the remuneration exceeded the fair market value of services rendered by the director or that the company did not derive commensurate business benefit from such services.
29.The commercial expediency and business necessity of an expenditure must be examined from the perspective of a prudent businessman and not from the subjective viewpoint of the Revenue authorities.
30.The above arguments of the Assessee have been duly upheld by the CIT(A)/NFAC and the above addition has been deleted. Reference in this regard is made to Para 27 & 28 of the CIT(A) order at page-74 wherein the CIT(A) has recorded the following observations:
"27.I have considered the order of the AO and the contentions of the appellant. Section 40A(2)(b) empowers the AO to disallow expenditure incurred in respect of payments to specified persons if, in his opinion, such expenditure is excessive or unreasonable having regard to the fair market value of goods/services, the legitimate needs of the business, and the benefit derived by or accruing to the assessee. However, such opinion must be based on objective criteria and cogent evidence. The AO must demonstrate how and why the payment is considered excessive. A mere relationship between the parties does not automatically render the payment unreasonable. In the present case, the AO has not brought any comparable case or market data to establish that the remuneration paid to the Directors was excessive. No inquiry or verification appears to have been conducted with third parties. The payment is evidenced by regular books of accounts, and there is no allegation of bogus or non-business expenditure.
28.Further, the CBDT Circular No. 6-P dated 06/07/1968 clarifies that the provisions u/s. 40A(2) are meant to check tax evasion through excessive or unreasonable payments to relatives or associate concerns. Also, in the case of CIT v. Indo Saudi Services (Travel) (P.) Ltd. [2008] 219 CTR 562 (Bombay), the Hon'ble Bombay High Court has held that where the revenue was not in a position to point out how the assessee evaded payment of tax by alleged payment of higher commission to its sister concern since the sister concern was also paying tax at higher rate, disallowance of alleged excess commission paid to the sister concern was not justified. As pointed out by the appellant, in the case of both the company and the Directors, tax is payable at the same rates, and, therefore, the transaction is tax neutral. Hence, there is no question of any tax evasion in the instant case. Since the AO has not brought any material on record to demonstrate that excess or unreasonable remuneration had been paid to the Directors by the appellant company with an intention to evade tax, the provisions of Section 40(A)(2)(b) will not apply to the case."
Further, it is humbly submitted that the Assessee wishes to place reliance on the cases which are attached at S.no 19-23 of the case law compilation, page 188-230.
Accordingly, the relief granted by the Ld. CIT(A) on account of director's remuneration deserves to be sustained and the corresponding ground raised by the Revenue is liable to be dismissed.
C. Ground no. 4: Disallowance under section 40A(2)(b) of the Act amounting to Rs. 49,07,000/-
At the outset, it is humbly submitted that the Ld. AO has made a disallowance under section 40A(2)(b) of the Act in respect of payments made to specified persons. The details of such payments have already been reproduced at internal pages 77 to 78 of the CIT(A) Order and, for the sake of brevity, are not being repeated herein.
The Ld. AO has also failed to point out any circumstance suggesting that the transactions are sham, fictitious, non-genuine, or not incurred for the purposes of business. The payments have been made through regular banking channels, duly recorded in the books of account, and their genuineness has never been doubted.
It is humbly reiterated that the provisions of section 40A(2)(b) can be invoked only where the AO forms an opinion, based upon objective material and cogent evidence, that the expenditure is excessive or unreasonable having regard to:
the fair market value of the goods, services, or facilities;
the legitimate needs of the business; and
the benefit derived by or accruing to the Assessee therefrom.
However, in the present case, the Ld. AO has failed to undertake any exercise whatsoever to determine the fair market value of the services or facilities received. No comparable cases, industry benchmarks, or independent enquiries have been brought on record to support the allegation that the payments were excessive or unreasonable.
It is pertinent to note that the Ld. AO has proceeded to disallow 25% of the expenditure on a purely ad hoc basis without demonstrating as to how such percentage represents the excessive portion of the expenditure. Such an ad hoc disallowance, unsupported by any material evidence, is unsustainable in law.
It is further worth mentioning that most of the recipients are taxable at the maximum marginal rate. Therefore, the transactions are substantially tax-neutral in nature. Further, it is humbly submitted that the Assessee wishes to place reliance on the cases which are attached at S.no 19-23 of the case law compilation, page 188-230.
In view of the aforesaid facts and circumstances, it is respectfully submitted that the CIT(A)/NFAC has rightly appreciated the facts of the case and deleted the impugned disallowance. Accordingly, the relief granted by the CIT(A)/NFAC deserves to be upheld and the corresponding ground raised by the Revenue is liable to be dismissed.
D. Ground no. 5: Addition of Rs. 3,73,98,925/- on account of decline in Gross Profit Rate
At the outset, it is humbly submitted that during the year under consideration there has been a decline in the Gross Profit rate by 1.44% and in the Net Profit ratio by 1.67% as compared to the preceding year. The comparative chart depicting the Gross Profit and Net Profit ratios for the relevant years has already been reproduced at internal pages 86 and 87 of the CIT(A) order and, for the sake of brevity, the same is not being reproduced herein.
In this regard, it is submitted that the decline in the Gross Profit rate is fully explained by the substantial increase in the cost of raw materials during the year under consideration. The Assessee operates as a government contractor and undertakes manufacturing and supply activities under the Integrated Child Development Scheme. Since the sale prices were governed by long-term contractual arrangements, the increase in raw material prices could not be passed on to the Government authorities. Consequently, the increased cost of raw materials directly impacted the trading results and led to a corresponding reduction in the Gross Profit rate. The details are tabulated as under:
It is pertinent to note that the increase in raw material cost constitutes a direct expenditure forming part of the trading account. Therefore, any substantial increase in such direct costs would naturally result in a decline in the Gross Profit rate. The Ld. AO has failed to controvert the aforesaid explanation with any material evidence.
The books of account of the Assessee have been maintained in the regular course of business and are duly supported by bills, vouchers, and other documentary evidences. The accounts are duly audited and neither the statutory auditors nor the tax auditors have pointed out any discrepancy therein. Further, the Ld. AO has also failed to identify any defect in the books of account maintained by the Assessee.
It is a trite law that an addition on account of low Gross Profit cannot be sustained in the absence of rejection of books of account under section 145(3) of the Act. In the present case, the provisions relating to rejection of books have admittedly not been invoked by the Ld. AO and the books of account have been accepted as such.
A mere decline in the Gross Profit rate, by itself, cannot lead to an inference that the accounts maintained by the Assessee are incorrect or that any expenditure claimed is non-genuine. The burden lies upon the Revenue to establish, through cogent material, that the accounts do not reflect the correct state of affairs. However, no such material has been brought on record in the present case. The CIT(A) while accepting the contentions of the Assessee has recorded the findings in Para 37, page-90 of the aforesaid order which are as under:
“………………In the present case, the AO has not brought on record any material which suggest that the appellant has suppressed its sales made during this year. Moreover, before making a best judgement assessment, the AO is required to reject the books of accounts. In the instant case, the AO has not rejected the books of accounts. This shows that the AO had not found any defects or discrepancies in the books of accounts maintained by the appellant. In such a situation, the AO was not justified in estimating the gross profit of the appellant. Accordingly, I find that the impugned addition of Rs.3,73,98,925/-cannot be sustained and the AO is directed to delete the same,"
In view of the aforesaid facts and circumstances, it is humbly submitted that the CIT(A)/NFAC has rightly deleted the impugned addition after appreciating the explanation furnished by the Assessee and the material available on record. Accordingly, the relief granted by the CIT(A)/NFAC deserves to be upheld and the corresponding ground raised by the Revenue is liable to be dismissed.”
From examination of record in light of aforesaid rival contention, it is crystal clear that Ld. CIT(A) in para No. 8 mentioned appellant’s submission made during the course of appellate proceedings and gave decision regarding unsecured loans of Rs. 60,97,22,000/- from various parties from para no. 9 to 17 and deleted additions of Rs. 44,05,22,000/- u/s 68 of the Act.
Regarding assessment of income to the extent of Rs. 74.92 lacs which was already offered to tax having resulted in double taxation of income held that the appellant has in para no. 22 and 22.2 held that the appellant admitted that Rs. 6,26,869/- was inadvertently not disallowed vide computing total income. The AO was directed to verify claim of assessee that interest income of Rs. 74,91,538/- has been offered to tax twice in A.Y. 2015-16 as well as A.Y. 2016-17 and if the contention is found to be correct the appellant’s income for the year under consideration shall be reduced to that extent.
Regarding disallowance of Rs. 86 lacs on account of increase of Directors’ remuneration, Ld. CIT(A) in para no. 25 to 29 observed that Ld. AO has not brought any comparable case or market data to establish that the remuneration paid to the Directors was excessive and directed to delete the addition of Rs. 86,00,000/- on account of disallowance u/s 40A(2)(b) of the act.
Regarding disallowance of 25% of payments made to persons covered u/s 40A(2)(b) of the act treating payments to that extent to be excessive. Ld. CIT(A) in para no. 32 observed that the AO has not brought out that the appellant company had made the payments in question with an intention to evade tax and ordered deletion of the addition of Rs. 49,07,000/- made on account of ad hoc disallowance u/s 40A(2)(b) of the Act.
With regard to addition of Rs. 3,73,98,925/- on account of decline in gross profit rate, ld. CIT(A) in para no. 35 to 37 observed that Ld. AO has not brought on record any material to suggest that the appellant has suppressed its sales made during this year. Before making a best judgment assessment, Ld. AO is required to reject the books of accounts. In the instant case, The AO has not rejected the books of accounts. This shows that the AO had not found any defects or discrepancies in the books of accounts maintained by the appellant and ordered deletion of Rs. 3,73,98,925/-.
In view of above grounds of appeal of revenue being devoid of merit are rejected.
In the result, the application for condonation of delay of 8 days in filing the appeal is allowed and the appeal filed by the revenue is dismissed.