ITAT Partly Allows Appeal: Restricts Addition on Bogus Creditors to 25%

The assessee is engaged in the trading of fabrics and garments, filed her return for AY 2012-13, declaring an income of Rs. 3.52 lakh. During scrutiny, the Assessing Officer noted sundry creditors of Rs. 6.77 crore, including Rs. 3.48 crore under “Retail Creditors Control account.” Notices issued u/s. 133(6) to 27 parties were largely returned unserved, and the AO treated Rs. 3.50 crore as bogus creditors, adding it back to income.

CIT(A) Held: The CIT(A) upheld the addition in December 2016. On appeal, the ITAT initially deleted the addition in 2018, but the High Court in July 2024 set aside that order, remanding the matter to the ITAT to re-examine the issue in light of Section 37.

Issue Raised: Whether the entire addition of Rs. 3.50 crore as bogus sundry creditors was sustainable, or whether only expenditure relatable to unverifiable purchases could be disallowed under Section 37.

ITAT’s Decision: The Tribunal observed that the AO had added closing balances of creditors rather than disallowing purchases. Since the assessee had shown opening balances of Rs. 1.90 crore and purchases of Rs. 2.08 crore during the year, only the latter could be examined under Section 37. It noted that while sales were accepted, payments to most creditors were shown in small cash amounts below Rs. 20,000, raising doubts about the genuineness.

Considering that purchases from one party were duly substantiated, the Tribunal excluded that from addition. For the remaining creditors, the Tribunal held that it would be fair to disallow 25% of the purchases, i.e., Rs. 45.32 lakh, to balance the revenue’s concern with business realities. Thus, the appeal was partly allowed.

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