Bangalore ITAT Sends ₹1 Crore Section 68 Addition Back to AO: Merely Calling a Credit a "Customer Advance" Does Not Discharge the Assessee's Burden
Background and Overview
The Income Tax Appellate Tribunal, Bangalore Bench, in the matter of Kolluri Indu Sekhar Vs DCIT (ITAT Bangalore), has restored two disputed additions to the file of the Assessing Officer for fresh adjudication — one involving a ₹1 crore credit under Section 68 of the Income-tax Act, 1961, and another arising from estimation of net profit at 1% of turnover. The Tribunal's ruling underscores a fundamental principle: an accounting label affixed to a transaction does not substitute for evidence. The assessee's inability to establish the identity, creditworthiness, and genuineness of the credit in question, particularly when no goods changed hands and repayment with interest followed nearly three years later, warranted deeper examination rather than acceptance at face value.
The assessment year under consideration is 2017-18, and the original assessment order was passed on 25 December 2019 under Section 143(3) of the Income-tax Act, 1961 by the Income Tax Officer, Ward-1(4), Tirupati.
Profile of the Assessee and Return Filed
The assessee, Shri Kolluri Indu Sekhar, is an individual who carried on a palm-oil trading business as the proprietor of Sidhi Oil Traders. He filed his return of income on 31 October 2017, declaring a total income of ₹14,58,870. The return was subsequently selected for scrutiny, primarily to examine cash deposits made during the demonetisation period and the nature of unsecured loans reflected in the books.
What the Assessing Officer Found
Unsecured Loans and the Section 68 Addition
Upon examination, the Assessing Officer noticed an increase of approximately ₹2.22 crore in unsecured loans during the year. The assessee furnished confirmations from several parties, which included names, addresses, Permanent Account Numbers, amounts advanced, and assessment particulars. Despite this, the Assessing Officer remained unsatisfied with the creditworthiness of 11 creditors and the genuineness of the transactions associated with them. An addition of ₹2,23,50,000 was accordingly made under Section 68 of the Income-tax Act, 1961.
Cash Deposits During Demonetisation
The Assessing Officer also noted that the assessee had deposited cash aggregating ₹3,18,40,500 across his IDBI Bank and Punjab National Bank accounts. This represented 13.87% of total turnover. Since the Assessing Officer proceeded to estimate trading results, no separate addition was made for these deposits.
Profit Estimation Due to Absence of Quantitative Records
Observing that the assessee — despite being a trader — had not produced quantitative details of purchases, sales, and closing stock, the Assessing Officer estimated net profit at 1% of gross sales. This worked out to ₹22,96,439, compared to the net profit of ₹14,45,573 declared by the assessee. The resulting difference of ₹8,50,867 was added to the assessee's income.
Proceedings Before the CIT(A)
Assessee's Submissions
Before the learned CIT(A), the assessee argued that:
- The addition under
Section 68was based solely on a comparison of opening and closing loan balances, without any proper inquiry. - The books of account were duly audited and no specific defect had been identified.
- Non-maintenance or non-production of quantitative details alone could not justify rejection of books and an arbitrary profit estimate.
- Confirmations covering identity, PAN, amounts, creditworthiness, and genuineness had been furnished for the creditors in question, satisfying the initial burden under
Section 68.