Facts of the Case

The assessee, a partnership firm engaged in civil construction works, filed its return declaring income of ₹28,69,950. The Assessing Officer completed assessment under section 143(3), determining income at ₹2,52,05,958 by making various additions and disallowances.

Major issues included ad hoc disallowances of labour charges and material purchases, application of a 6% net profit rate by the CIT(A), and addition of ₹1,53,97,250 on account of alleged bogus sundry creditors. Out of this, the CIT(A) sustained ₹1,36,66,720 after granting partial relief for certain old balances.

The Assessing Officer had issued notices under section 133(6) to selected creditors, which were returned unserved. The assessee was asked to produce creditors or evidence supporting liabilities but failed to do so, leading to treatment of the balances as unexplained income.

Issues Involved

  1. Whether outstanding sundry creditors can be treated as unexplained cash credits under section 68.
  2. Whether balances carried forward from earlier years can be taxed in the current assessment year.
  3. Whether failure to produce creditors automatically renders liabilities bogus.
  4. Whether verification of past records is necessary before making additions.

Petitioner’s Arguments

The assessee pressed only the ground relating to addition of ₹1,36,66,720 sustained by the CIT(A) on account of sundry creditors. It was contended that the liabilities relating to 23 parties as on 31.03.2011 were identical to those appearing as closing balances on 31.03.2010, indicating that they were opening balances carried forward from earlier years.

It was argued that taxing such balances in AY 2011-12 was improper because no fresh credit had arisen during the year. The assessee also submitted that the addition resulted in an unrealistic jump in net profit from about 2.25% to 26%, demonstrating its arbitrariness.

Respondent’s Arguments

The Revenue contended that the assessee had failed to produce bills, vouchers, or parties to substantiate the genuineness of the liabilities. It was further argued that only three creditors were found to represent old balances, for which relief had already been granted by the CIT(A), and that the remaining balances were not proven to be carried forward from earlier years.

Court Order / Findings (ITAT Allahabad)

The Tribunal noted that if the outstanding credit balances as on 31.03.2011 were indeed identical to those as on 31.03.2010, they would represent opening balances, and no addition under section 68 could be made in the current year.

However, since conflicting findings existed—where the CIT(A) had treated only three balances as old—the Tribunal held that the issue required factual verification. Accordingly, the matter was restored to the Assessing Officer with directions to examine:

  • Whether the credits were carried forward from earlier years
  • Past assessment records
  • Supporting evidence produced by the assessee

Additions, if any, were to be made only after proper verification. Ground relating to sundry creditors was allowed for statistical purposes, and the appeal was partly allowed.

Important Clarification

The Tribunal clarified that section 68 applies to credits appearing during the relevant previous year. Liabilities carried forward from prior years cannot be taxed again in a subsequent year unless fresh evidence shows that they represent undisclosed income of that year.If you want, I can now prepare a Complete “Section 68 — Sundry Creditors & Opening Balance Case Law Digest” (Trade creditors, unsecured loans, old balances, confirmations, etc.) covering leading ITAT/High Court/Supreme Court rulings — extremely valuable for assessments and appeals. Just say the word.

Link to download the order - https://www.mytaxexpert.co.in/uploads/1771220723_MSBABABUILDERSALLAHABADVS.ACITALLAHABAD.pdf

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