Section 68 Income Tax Act | No Addition for Trade Creditors When Purchases, Sales & Stock Are Accepted by AO: ITAT Delhi

The Income Tax Appellate Tribunal (ITAT), Delhi, has delivered a significant ruling clarifying that no addition under Section 68 of the Income Tax Act, 1961 can be made for trade creditors when the Assessing Officer (AO) has accepted the assessee's purchases, sales, and stocks. The judgment also addresses the disallowance under Section 40(a)(ia) for non-deduction of tax at source, restoring the matter for fresh adjudication with directions to avoid double taxation.

Background & Facts

The Dispute

The appellant, Rajiv Mittal, is an individual engaged in the wholesale trading of beer and whiskey in Uttar Pradesh. For the Assessment Year (AY) 2022-23, he filed his income tax return on 07.10.2022, declaring a total income of Rs. 1,51,38,290. During scrutiny proceedings, the AO noted that the assessee had claimed sundry creditors of Rs. 8,90,75,232 in the liability side of his balance sheet as on 31.03.2022. Despite repeated notices under Section 142(1) of the Act, the assessee failed to submit the PAN, confirmation, and Income Tax Returns (ITRs) of various creditors.

Key Facts

• The assessee claimed purchases of Rs. 222,89,62,042 in the profit and loss account for AY 2022-23.
• The AO identified M/s Molson Coors India Pvt Ltd as a sundry creditor with a closing balance of Rs. 34,17,815, which remained unexplained as the party refused to receive the notice under Section 133(6).
• The AO added Rs. 34,17,815 under Section 68 read with Section 115BBE as unexplained sundry creditor.
• The Commissioner of Income Tax (Appeals) [CIT(A)] confirmed only the differential amount of Rs. 22,61,492 (Rs. 34,17,815 - Rs. 11,56,323), as the creditor had declared a lower closing balance.
• The assessee provided a reconciliation of the balance in the Paper Book, attributing the difference to sales and rebate booked in succeeding years by the assessee, while the creditor booked the transaction in the current year.

Procedural History

• 23.03.2024: AO passed assessment order under Section 143(3), adding Rs. 34,17,815 under Section 68.
• 01.09.2025: CIT(A) confirmed Rs. 22,61,492 as the differential amount.
• 11.05.2026: ITAT Delhi heard the appeal (ITA No. 6748/Del/2025).
• 29.06.2026: ITAT pronounced the final order.

Relief Sought

The assessee challenged the addition of Rs. 22,61,492 under Section 68 and the disallowance of Rs. 3,24,000 under Section 40(a)(ia) for non-deduction of tax at source on rental payments.

The Legal Issue

The central legal questions were:

1. Whether Section 68 of the Income Tax Act permits addition for trade creditors when the AO has accepted the assessee's purchases, sales, and stocks?
2. Whether disallowance under Section 40(a)(ia) is justified if the recipient of rental income has already offered it to tax in their ITR?

Arguments Presented

For the Appellant

• Legal Precedent: Relied on the judgment of the Hon'ble Delhi High Court in CIT vs Ritu Anurag Aggarwal (2 taxmann.com 134), which held that no addition under Section 68 can be made for sundry creditors if the AO has accepted the trading results (purchases, sales, and stocks).
• Reconciliation Evidence: Submitted reconciliation and confirmation of balance from the creditor to justify the differential amount.
• Section 40(a)(ia) Argument: Contended that if the recipients (landlords) have offered rental income to tax in their ITRs, no disallowance should be made under Section 40(a)(ia) to avoid double taxation.

For the Respondent

• Lack of Evidence: Argued that the assessee failed to provide sufficient evidence to reconcile the difference in the closing balance of the sundry creditor.
• Non-Deduction of TDS: Contended that the assessee did not deduct tax at source on rental payments, justifying the disallowance under Section 40(a)(ia).

The Court's Analysis

On Section 68 Addition for Trade Creditors

The ITAT examined the legal principle established in CIT vs Ritu Anurag Aggarwal, where the Delhi High Court held:

"Once the sales, purchases, and gross profits as disclosed by the assessee have been accepted by the Assessing Officer, no addition could be made under Section 68 for sundry creditors, as the creditors' outstanding related to purchases and the trading results were accepted."

The ITAT observed that the AO had not disturbed the purchases, sales, or closing stocks disclosed by the assessee, which stood accepted by the revenue. It reasoned that trade creditors arise solely from purchases, and both sides of the transaction (purchases and creditors) are intrinsically linked. The ITAT held:

"How can one side of the transaction be accepted and the other side of the same transaction be disputed by the revenue?"

Relying on the jurisdictional High Court's decision, the ITAT concluded that no addition under Section 68 could be made for trade creditors when the AO had accepted the assessee's trading results.

On Section 40(a)(ia) Disallowance

The ITAT noted that the assessee had paid rent to three landlords (Sandeep Kaushik, Ved Prakash, and Rajendra Kuchchal) without deducting tax at source, leading to a disallowance of 30% of Rs. 10,80,000 (Rs. 3,24,000) under Section 40(a)(ia). The assessee submitted:

• The ITR of one landlord (Sandeep Kaushik) showing rental income offered to tax.
• An affidavit and PAN/Aadhaar card of another landlord (Rajendra Kuchchal).
• No details for the third landlord (Ved Prakash).

The ITAT acknowledged the assessee's request for an opportunity to prove that the recipients had offered the rental income to tax in their ITRs. It invoked the second proviso to Section 40(a)(ia) read with Section 201(1), which states that no disallowance is required if the recipient has paid tax on the income. The ITAT observed:

"If the recipient has paid the taxes for the rental income, then no corresponding disallowance under Section 40(a)(ia) could be made in the hands of the assessee payer. This would avoid double taxation also."

In the interest of justice and fair play, the ITAT restored this issue to the AO's file for de novo adjudication, allowing the assessee to furnish evidence that the recipients had offered the rental income to tax.

The Verdict

1. Section 68 Addition: The ITAT set aside the addition of Rs. 22,61,492 under Section 68, holding that no addition could be made for trade creditors when the AO had accepted the assessee's purchases, sales, and stocks.
2. Section 40(a)(ia) Disallowance: The ITAT restored the matter to the AO's file for fresh adjudication, directing the assessee to prove that the landlords had offered the rental income to tax. If proven, no disallowance under Section 40(a)(ia) would apply.
3. General Grounds: Grounds 4 and 5 were dismissed as general and not requiring specific adjudication.

The appeal was allowed for statistical purposes.

What This Means For Similar Cases

Trade Creditors Cannot Be Added Under Section 68 If Trading Results Are Accepted

• Doctrinal Clarity: This judgment reaffirms that Section 68 cannot be invoked to make additions for trade creditors if the AO has accepted the assessee's purchases, sales, and stocks. The rationale is that trade creditors are the flip side of purchases, and both cannot be treated differently.
• Practical Application: Assessees can rely on this precedent to challenge additions under Section 68 where the AO has not disputed the underlying purchases or trading results. The burden shifts to the revenue to justify why one side of the transaction is accepted while the other is disputed.

Disallowance Under Section 40(a)(ia) Avoids Double Taxation

• Second Proviso to Section 40(a)(ia): The ITAT emphasized that if the recipient of income (e.g., rent) has already paid tax on it, no disallowance should be made in the payer's hands under Section 40(a)(ia). This aligns with the principle of avoiding double taxation.
• Procedural Safeguard: Assessees must furnish evidence (e.g., ITRs, affidavits, PAN/Aadhaar) to prove that the recipient has offered the income to tax. The ITAT's decision to restore the matter underscores the importance of substantive compliance over mere technical defaults.
• Actionable Takeaway: Practitioners should:
  • Demand opportunities to prove compliance by recipients.
  • Invoke the second proviso to Section 40(a)(ia) where applicable.
  • Highlight the risk of double taxation to persuade tribunals/courts to adopt a pragmatic approach.

Precedential Value of Jurisdictional High Court Decisions

• Binding Nature: The ITAT gave significant weight to the Delhi High Court's decision in CIT vs Ritu Anurag Aggarwal, treating it as binding precedent. This underscores the importance of jurisdictional High Court judgments in tax litigation.
• Strategic Litigation: Assessees should prioritize citing jurisdictional High Court decisions to strengthen their legal arguments, especially in matters involving interpretation of statutory provisions.