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Judgment
PER SHRI M BALAGANESH, ACCOUNTANT MEMBER:
The appeal in ITA No.918/Del/2026 for AY 2018-19, arises out of the order of the Id National Faceless Appeal Centre (NFAC), Delhi [hereinafter referred to as 'Id. CIT(A)', in short] dated 25.11.2025 against the order of assessment passed u/s 147 r.w.s. 144 of the Income-tax Act, 1961 (hereinafter referred to as 'the Act') dated 20.03.2023 by the Assessing Officer, NFAC, Delhi (hereinafter referred to as 'Id. AO').
The Ground Nos. 1, 14 and 15 raised by the assessee are general in nature and does not require any specific adjudication.
The Ground Nos. 2 and 3 raised by the assessee are connected with the grounds raised by the assessee on merits and hence the same would be considered while adjudicating the grounds raised on merits.
No arguments were advanced in support of Ground Nos. 4, 5 and 6 raised by the assessee. Hence the same are hereby dismissed as not pressed.
The Ground Nos. 7 to 13 raised by the assessee are challenging the disallowance made under section 40A(3) of the Act in the sum of Rs 3,46,18,360 on account of purchases made by the assessee and treating them as bogus. The interconnected issue involved therein is challenging the addition made under section 68 of the Act in respect of trade payables in the sum of Rs 2,20,68,360.
We have heard the rival submissions and perused the materials available on record. The assessee is engaged in the business of export of garments and had exported garments to M/s Skystar International General Trading during the year under consideration. The return of income for the assessment year 2018-19 was originally filed by the assessee company on 9-10-2018 declaring total income of Rs 3,42,420. Based on the specific information as flagged by the risk management strategy formulated by CBDT through insight software under the head “High Risk CRI / VRU cases”, the case of the assessee was sought to be reopened under section 147 of the Act. After following the due procedure prescribed in terms of section 148 of the Act under the amended law, notice under section 148 of the Act was issued to the assessee on 25-3-2022. During the re-assessment proceedings, the Learned AO disputed the genuineness of purchases amounting to Rs 3,46,18,360 made by the assessee from M/s Decent Trading and Exim alleging that the said concern was merely engaged in providing accommodation bills without actual supply or delivery of goods. The Learned AO at page 10 and page 26 of the assessment order accepted the fact that assessee had actually exported the goods and observed that the goods exported by the assessee must have been purchased from some other parties, other than M/s Decent Trading and Exim. The assessee furnished the complete purchase register and sales register containing item wise details of purchase and sales for the relevant period . The quantitative tally of stock could be identified from these details itself. The books of accounts of the assessee were also produced before the Learned AO. The entire details furnished by the assessee qua the purchases, sales and other items, books of accounts and the book results were accepted by the Learned AO and the same were not rejected by invoking the provisions of section 145(3) of the Act. The entire sales made by the assessee were only exported to M/s Skystar International General Trading. The Learned AO had only doubted the identity and genuineness of M/s Decent Trading and Exim and corresponding purchases made by the assessee from the said supplier. In other words, the Learned AO having accepted the sales made by the assessee categorically agrees that goods had been purchased by the assessee and it had entered the business premises of the assessee and thereafter it has been exported by the assessee. The only dispute raised by the Learned AO is the assessee had not made purchases from M/s Decent Trading and Exim. This goes to prove that the Learned AO had not doubted the factum of purchase. He has only doubted the supplier who had supplied the goods to the assessee. The Learned AO presumed that assessee had made purchases of Rs. 3,46,18,360 from sources other than from M/s Decent Trading and Exim in cash and also presumed that such purchases were made in cash in excess of Rs 20,000 which is in violation of provisions of section 40A(3) of the Act and accordingly made disallowance under section 40A(3) of the Act.
The Learned AO further proceeded to make addition under section 68 of the Act in respect of balance outstanding in sundry creditors account qua this party i.e. Decent Trading and Exim as unexplained credit separately in the sum of Rs 2,20,68,360.
The additions / disallowance made by the Learned AO was upheld by the Learned CITA.
We find that the Learned AO had alleged that M/s Decent Trading and Exim is a bogus concern and is merely providing accommodation bills without actual delivery of goods. But the Learned AO had categorically accepted that the goods reflected in the impugned purchase bills were actually purchased and exported by the assessee. In fact, the assessment order specifically records that since the garments stood exported, the purchases of Rs 3,46,18,360 were in fact made though allegedly from some other unidentified parties. The Learned AO had accepted the purchase register and sales register containing item wise quantitative details. Further, the books of accounts have not been rejected under section 145(3) of the Act nor has any gross profit estimation been applied by the Learned AO. Hence, from the findings recorded in the assessment order itself, the quantity and value of purchase stand fully accepted. Once the purchases and corresponding exports are accepted, merely disputing the identity of the supplier cannot justify disallowance under section 40A(3) of the Act or under section 68 of the Act in respect of the very same purchases and outstanding liability of the Sundry Creditor thereof. There is absolutely no material brought on record by the Learned AO that payment of Rs 3,46,18,360 had been made in cash by the assessee on a single day in excess of limits prescribed in section 40A(3) of the Act . The entire disallowance was made on assumption basis by the Learned AO without bringing any cogent material or corroborative material on record. The Learned AO further records that the entire purchases were outstanding as on 31-03-2018 and only a sum of Rs 1,25,50,000 was paid in the subsequent year through banking channels by the assessee to M/s Decent Trading and Exim. This finding clearly goes to prove that no payment whatsoever was made to the extent of purchases of Rs 3,46,18,360 by the assessee during the year either in cheque or in cash. When there is no payment made at all by the assessee, how can it be assumed or presumed by the Learned AO that payment has been made in cash by the assessee in violation of provisions of section 40A(3) of the Act. On this count itself, the disallowance made under section 40A(3) of the Act deserves to be deleted.
For the purpose of applicability of provisions of section 40A(3) of the Act, the Learned AO should bring on record that cash payment in excess of Rs 10,000 on each occasion had been made to a particular person who is identifiable. In the instant case, no such finding has been recorded by the Learned AO in the entire assessment order or by the Learned CITA in his appellate order. The disallowance has been made by the Learned AO and confirmed by the Learned CITA merely on assumption that M/s Decent Trading and Exim was allegedly a bill provider and assessee must have made purchases from unknown parties in cash and that too in excess of Rs 10,000 on each occasion . Hence, the entire disallowance under section 40A(3) of the Act has been made entirely on assumption and presumption without giving any actual finding of actual cash payment which is a prerequisite of the section. Hence we have no hesitation to hold that the disallowance made under section 40A(3) of the Act by the revenue suffers from various factual and legal infirmities and is accordingly deleted.
The next addition made is in respect of outstanding liability standing in the name of the Sundry Creditor M/s Decent Trading and Exim in the sum of Rs 2,20,68,360 as on 31-3-2018 which was sought to be treated as unexplained credit under section 68 of the Act. There is absolutely no finding given by the Learned AO that there was any receipt of sum of money from the said party during the year, which is a basic pre-requisite for applicability of section 68 of the Act. Admittedly no sum of money was received during the year from M/s Decent Trading and Exim by the assessee. Hence the provisions of section 68 of the Act per se cannot be applied in the instant case. A purchase transaction is an expenditure entry and the corresponding credit to the supplier is merely the accounting effect of such purchase. It is not a cash credit within the meaning of section 68 of the Act. In this regard, reliance has been rightly placed by the Learned AR on the decision of Hon’ble Jurisdictional Delhi High Court in the case of CIT vs Ritu Anurag Agarwal reported in 2009 (7) TMI 1247 in ITA No. 325 / 2008 dated 22-07-2009 wherein it was categorically held as under:-
“This finding of AO remained undisturbed before the CIT(A) as well and has been accepted by the ITAT. Proceeding on this basis, the ITAT observed that the sales, purchases as well as gross profits as disclosed by the assessee have been accepted by the Assessing Officer. Once this is accepted, we are of the opinion that the approach of the ITAT was correct in as much as the Assessing Officer did not consider this aspect while making additions of this sundry creditors under section 68 of the Income Tax Act. As there was no case for disallowance for corresponding purchases, no addition could be made under section 68 inasmuch as it is not in dispute that the creditors outstanding related to purchases and the trading results were accepted by the AO. We are, therefore, of the opinion that no substantial question of law arises for consideration in this case. The appeal is accordingly dismissed.”
Further we find that the Coordinate Bench of Mumbai Tribunal in the case of Shri Ganpatraj A Sanghavi vs ACIT in ITA No. 2826 / Mum / 2013 for assessment year 2009-10 dated 5-11-2014 had held as under :-
“4.The first issue relates to the disallowance of purchases made. The facts relating to the same are stated as under by the Id. CIT(A):
"3.Ground No.1 is against the addition of Rs.1,74,01,436/- on account of bogus purchases. Brief facts in this regard are that during the assessment proceedings, inquiries were made u/s 133(6) from various parties from where the assessee has shown purchase of metals. The notice issued to the five parties ie. M/s Montex Industries, M/s Roshan Steel Impex, M/s Mokesh Metal and Tubes, M/s Viraj Steel and Alloys and M/s Shivam Metals Industries returned back by the postal authorities with a remark "not known". Accordingly, the AO issued show cause notice to the assessee as to why the purchases from these parties should not be treated as non genuine and the same should not be added back. In response to the said notice, the assessee furnished ledger copy of purchases, signed by the respective parties and copies of sample purchase bills along with a few delivery challans and claimed that the purchases are genuine. However, the AO further inquired this matter through on the spot field inquires by the Inspector, who submitted that none of the parties exists at the given address and the inquiries with the nearby shops revealed that nobody is aware about these parties. The report of the Inspector forms part of the assessment order. On the basis of detailed enquiries, the AO came to the conclusion that the assessee has managed to obtain the signatures of these parties, but actually these parties does not exists at the given address. The AO has further observed that (i) the receiver's signature are not affixed on the delivery challans of the purchase from these parties.
(ii)the mode of transport for delivery of these goods is not mentioned on the purchase bills of these parties whereas the purchases invoice of other parties contains the lorry number etc.(iii) Major portion of purchases are still shown outstanding in the list of sundry creditors. On the basis of all these facts, the AO has held that the assessee has merely obtained accommodation entries for these purchases. If at all such purchases have been made from some other party, to make corresponding sales, the same would obviously be in cash, which would attract the provisions of section 40(A)(3) of the IT Act Accordingly, the AO has disallowed Rs.1,74,01,436/- on account of such bogus purchases." ………………
8.Be that as it may, another important factor the bank account coples collected by the assessing officer shows that the assessee had made the payments to the above said parties by way of account payee cheques. Thus, it is seen that the transactions have been routed through the bank accounts. Further, it is not the case of the assessing officer that the assessee has indulged in accounting of bogus purchases. When the assessee submitted that he could not have effected the sales without making corresponding purchases, the AO has taken the view that the assessee could have effected purchases in the grey market, which conclusion is, in fact, not supported by any material. Under this impression only, the AO has further expressed the view that the assessee would have purchased the materials by paying cash thus violating the provisions of sec. 40A(3) of the Act, which is again based on only surmises. In the absence of any material to support the said view, we are unable to agree with the view taken by the tax authorities that the purchases amount is liable to be disallowed u/s 40A(3) of the Act. On the same impression only, the AO has expressed the view in the remand report that the purchases amount is also liable to assessed u/s 69C of the Act as the source of purchases were not proved. Again the said conclusion is based upon only surmises, which could not be sustained. Thus, it is seen that the assessing officer has accepted the fact that the quantity details of purchases and sales have been reconciled by the assessee. Further, various case law relied upon by the assessee also supports his case. Under these set of facts, we are of the view that the Ld CIT(A) was not justified in confirming the disallowance of purchases. Accordingly, we set aside the order of Ld CIT(A) on this issue and direct the AO to delete the disallowance of purchases.”
It could be seen that the facts before the Mumbai Tribunal supra are exactly identical with that of the assessee herein. Hence the ratio laid down by the Mumbai Tribunal referred supra would be squarely applicable to the facts of the instant case before us. Further the issue in dispute is also resolved by the decision of Hon’ble Jurisdictional Delhi High Court referred supra. Respectfully following both the decisions, we have no hesitation to hold that the provisions of section 68 of the Act cannot apply to trade creditors. Infact the assessee’s case is still on a stronger wicket as the revenue had sought to add both the debit side in the form of purchases and the credit side of the same transaction in the form of outstanding sundry creditor , thereby leading to double addition. Further there was no receipt of money from the said supplier M/s Decent Trading and Exim during the year so as to apply the provisions of section 68 of the Act.
Hence both the disallowance under section 40A(3) of the Act and addition under section 68 of the Act fail for more than one reason as detailed supra and are accordingly hereby deleted. Accordingly, the Ground Nos. 2,3, 7 , 8, 9,10,11,12 & 13 raised by the assessee are hereby allowed.
In the result, the appeal of the assessee is partly allowed.
Order pronounced in the open court on 21/08/2026.