Silent Creditors, Genuine Purchases and Unsecured Loans: Key Takeaways from ITAT Rajkot in Vinodkumar Maheshwari Vs ACIT

Overview of the Decision

The Rajkot Bench of the Income Tax Appellate Tribunal in Vinodkumar Maheshwari Vs ACIT examined whether outstanding trade creditors and unsecured loans could be treated as unexplained cash credits under Section 68 merely because some parties did not reply to notices issued under Section 133(6) and because certain lenders had comparatively modest returned income. The Tribunal set aside additions aggregating to ₹6,96,17,009 and the related interest disallowance, holding that once the assessee furnishes cogent documentary evidence regarding identity, genuineness and creditworthiness, the Revenue must bring positive material on record to rebut that evidence.

Although the full text of the ITAT order is lengthy, the essence of the ruling revolves around three core controversies:

  • Addition on account of alleged bogus trade creditors of ₹6,25,37,562 under Section 68
  • Addition of unsecured loans of ₹64,40,000 under Section 68
  • Disallowance of interest expenditure of ₹6,39,447 relatable to the above loans

The ITAT ultimately deleted all three adjustments.

Factual Matrix

Business Profile and Scrutiny Selection

  • The assessee is an individual, proprietor of M/s Sai Metal Corporation, engaged in trading ferrous and non‑ferrous metal scrap.
  • For AY 2022-23, the assessee declared income of ₹1,58,92,790 on a turnover of about ₹166.83 crore.
  • The case was picked up for complete scrutiny on parameters such as:
    • Significant outstanding liabilities vis‑à‑vis income
    • Large squared‑up loan transactions
    • Low income in relation to TCS receipts from scrap business

During assessment, various notices under Section 143(2) and Section 142(1) were issued and complied with. The assessee filed, among other things, bank statements, GST records, and details of creditors and unsecured loans.

Trade Creditors – Basis of Addition

The Assessing Officer (AO) noticed large trade creditors in the balance sheet and issued notices under Section 133(6) to verify their balances. The position that emerged was:

  • In several cases, balances as per creditors’ replies matched the amounts recorded in the assessee’s books.
  • In some cases, no response was initially received through the e‑filing portal.
  • One creditor, Shree Hanuman Metal Corporation, showed a small difference of ₹50,000.

The AO focused on certain long‑outstanding balances, including:

  • About ₹48.91 lakh due to Chetan Alloys Pvt. Ltd.
  • About ₹2.13 crore due to Chetan Overseas Delhi Pvt. Ltd.

Taking the view that multiple creditors had not directly responded and that some balances were aged, the AO held that trade creditors aggregating to ₹6,25,37,562 were unexplained and made an addition under Section 68. According to the AO, the assessee had not produced adequate bills, stock records and other transactional evidence, and confirmations alone could not prove genuineness where creditors did not comply with Section 133(6) notices.

Unsecured Loans and Interest – Basis of Addition

In parallel, the AO examined unsecured loans reflected in the balance sheet. Notices under Section 133(6) were issued to the lenders seeking confirmations, ITR particulars and bank statements.

  • A loan of ₹70,00,000 from Harihar Cast Loan was accepted as explained after verifying bank and ITR records.
  • Loans totalling ₹64,40,000 from five other lenders were treated as unexplained under Section 68, primarily for two reasons:
    • Returned income of some lenders was lower than the amount lent, as per a single year’s ITR.
    • In the AO’s view, complete financial statements to prove creditworthiness were not on record for all parties.

Consequently, interest expenditure of ₹6,39,447 on these loans was disallowed on the footing that the underlying credits were not proved as genuine.

The assessment was completed under Section 143(3) read with Section 144B with these additions. The CIT(A)/NFAC sustained the AO’s action in full.

The ITAT addressed three principal questions:

  1. Trade Creditors: Can genuine business liabilities arising from recorded purchases be treated as unexplained under Section 68 solely because some suppliers fail to respond to Section 133(6) notices?
  2. Unsecured Loans: Is it correct to disbelieve lenders’ creditworthiness merely because the loan amount is higher than the income disclosed in a single assessment year?
  3. Interest Disallowance: When loans are supported by banking records, confirmations and evidence of repayment, can interest on such loans be disallowed without any independent defect in computation or TDS compliance?

Assessee’s Contentions

On Trade Creditors

The assessee contended that the AO’s addition hinged almost entirely on initial non‑response by seven creditors. During assessment as well as appellate/remand stages, the assessee had placed on record a wide set of documents:

  • Creditor‑wise ledger accounts
  • Contra‑confirmations from suppliers
  • Purchase invoices, e‑way bills and transportation proofs
  • Ageing analysis of creditors
  • Month‑wise GST returns, GSTR‑1, GSTR‑3B and GSTR‑2A extracts
  • Evidence of subsequent settlement of dues through banking channels

A tabular explanation was given creditor‑wise to show:

  • In the case of Chetan Overseas Delhi Private Limited (₹2,64,60,581) and Chetan Trade Exim Private Limited (₹1,47,19,341), replies to Section 133(6) notices were in fact filed on 04.03.2024, i.e. even before issue of the show‑cause notice dated 13.03.2024, and later payments were made through banking channels.