ITAT Deletes Rs. 3.98 Crore Addition, Says Old Balances Cannot Be Treated as Unexplained Credits

The Income Tax Appellate Tribunal (ITAT) has granted relief to Loom Crafts Shade Systems Pvt. Ltd. in a case concerning an addition of Rs. 3.98 crore made under Section 68 of the Income Tax Act.

The case involved two parties, namely Hotel Vakratunda and Nasir Saleem Haji, from whom the company had received amounts aggregating to Rs 3,98,76,128. During the course of the assessment of scrutiny, the AO held these amounts to be unexplained cash credits. The company had failed to prove the identity, creditworthiness and genuineness of the creditors.

Before the CIT(A), the company submitted that these were not unexplained loans but trade advances received from the customers in the normal course of business. Loom Crafts, which builds prefabricated structures and steel cottages, said customer deposits are common in its business to offset the cost of materials and manufacturing. The company provided ledger accounts, invoices, bank statements and other documents to back up its claim.

The CIT(A), on perusal of the records, noted that the amounts in dispute were not fresh credits received during the year under consideration. Instead, they were opening balances carried forward from previous financial years. The appellate authority also noted that the advances were in the form of genuine business transactions and were later adjusted against sales.

The CIT(A) observed that the correct year to approach was the year in which the credits first appeared in the books if the tax department had any doubts on the same. The authority also held that the company has sufficiently established the identity of the parties, the genuineness of the transactions and the source of funds through documentary evidence. Accordingly, CIT(A) deleted the addition. Being aggrieved by the decision, the revenue filed an appeal before the ITAT.

However, ITAT confirmed the findings of CIT(A). It was noticed that CIT(A) had examined evidence in detail and had passed a detailed and reasoned order. The Tribunal observed that the addition under section 68 was not sustainable, as the amounts represented old balances and not fresh credits introduced during the relevant assessment year.

The ITAT, therefore, found no reason to interfere with the order of the CIT(A) and dismissed the appeal filed by the Revenue. And, therefore, the deletion of the addition of Rs 3,98,76,128 is confirmed in favour of Loom Crafts Shade Systems Pvt. Ltd.