DY. COMMISSIONER OF INCOME TAX-6, KANPUR V. M/S NARAIN INSTITUTE OF MANAGEMENT STUDIES PVT. LTD., KANPUR

ITA 518/LKW/2017

AI Insights

The case involves the Department's appeal against the order of the ld. CIT(A)-2, Kanpur, which had granted partial relief to the assessee, M/s Narain Institute of Management Studies Pvt. Ltd., against the order of the ld. AO. The primary issue was the discrepancy in the reported figures of sundry creditors in the audited balance sheet and the income tax return, leading to an addition of Rs.3 Crores under section 68 of the Income Tax Act by the AO. The CIT(A) found no substantial evidence to support the AO's addition, leading to the Department's appeal. The Tribunal noted fundamental errors in the CIT(A)'s decision, particularly regarding the misapplication of sections and the handling of the balance-sheet discrepancies, and thus restored the matter for re-evaluation.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 707108 (ITAT-LUCKNOW)
• Duration Of Justice: 7 year(s) 10 month(s) 29 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-07-2025
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: 2009-2010
• Appeal Filed On: 10-08-2017
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: SANJEEV KRISHNA SHARMA; ADDL
• Assessee Lawyers: B. P. YADAV
• Keywords: Unexplained cash credit; Depreciation; Source of fund; Assessment record; Bogus
• Section: 143(3); 271(1)(c); 68; 69

Judgement Text

"1 IN THE INCOME TAX APPELLATE TRIBUNAL LUCKNOW ‘B’ BENCH, LUCKNOW BEFORE SH. KUL BHARAT, VICE PRESIDENT AND SH. NIKHIL CHOUDHARY, ACCOUNTANT MEMBER ITA No.518/LKW/2017 A.Y. 2009-10 Dy. Commissioner of Income Tax-6 Kanpur, U.P. vs. M/s Narain Institute of Management Studies Pvt. Ltd., HIG-IG- Block, Shyam Nagar, Kanpur-208013 PAN:AACCN2356B (Appellant) (Respondent) Assessee by: Sh. B.P. Yadav, Advocate Revenue by: Sh. Sanjeev Krishna Sharma, Addl CIT DR Date of hearing: 28.04.2025 Date of pronouncement: 09.07.2025 O R D E R PER NIKHIL CHOUDHARY, A.M.: This is an appeal filed by the Department against the order of the ld. CIT(A)-2, Kanpur passed under section 250 of the Income Tax Act, 1961 on 24.05.2017 granting partial relief to the assessee against the order of the ld. AO under section 143(3) r.w.s. 263 of the Income Tax Act, 1961 dated 31.03.215. The grounds of appeal are as under: - “1.That the Ld. CIT(A) erred in law and on facts in allowing relief of Rs.3,00,00,000/- u/s 68 of the IT Act, 1961 as it was noticed that the assessee company has shown sundry creditor amounting to Rs.3,34,87,504/- in audited balance sheet whereas in ITR the same has been shown as 34,87,504/- only. As the balance sheet is tallying on both side it is logical to conclude that asset have been understated by the same amount, hence the addition of Rs.3,00,00,000/- u/s 68 by the AO. 2. That the Ld. CIT(A) erred in law and on facts as the AO has stated in his order the amount has been deployed in asset creation, so it is telescopic and no separate addition is called for u/s 69 of the Act. Ld. CIT(A) has totally ignored the fact that the balance sheet showing creditors of Rs.3,34,87,504/- is matched in totality. If the error is termed as typographical error, then the balance sheet can not be matched. Ld. CIT(A) has also ignored the fact that in tax audit report of the company, current liabilities and provisions have been shown amounting to ITA No.518/LKW/2017 M/s Narain Institute of Management Studies Pvt. Ltd. A.Y. 2009-10 2 Rs.6,03,07,300/- which can only come after considering creditors of Rs.3.34,87,504/-. 3. That the order of Commissioner of Income Tax (Appeals), being erroneous, unjust and bad in law be vacated and the order of Assessing officer be restored. 4. That the appellant craves leave to modify any of the grounds of Appeal given above and/or add any fresh ground as and when it is considered necessary to do so.” 2. The facts of the case are that the assessee filed a return of income for the assessment year 2009-10 in response to a notice under section 148, in which it declared a total income of Rs.69,11,540/-. Subsequently, on that same date, the return was revised by the assessee at the same income. The case was assessed under section 143(3) and income was assessed at Rs.1,00,58,770/-. Subsequently, the ld. CIT-2, Kanpur passed an order under section 263 of the Income Tax Act, 1961 setting aside this assessment with a direction to make a fresh assessment. Accordingly, the case was taken up again for assessment. During the course of this second assessment, the ld. AO inter alia noticed that in the balance-sheet of the assessee, sundry creditors were reflected at Rs.3,34,87,504/-, but in the income tax return, the same had been disclosed at a figure of Rs.34,87,504/-. The ld. AO records that the assessee was asked to explain this discrepancy, but failed to explain the same. The Auditor of the company, who was one of the authorized representatives, was asked during the course of assessment proceedings with regard to the balance-sheet. The Auditor confirmed that the balance- sheet had been audited by him and the figures were as per the books. The other Authorized Representative Sh. Arun Singh was thereafter asked to produce the books of accounts to explain this excess credit of Rs.3 Crores but he failed to produce the books of accounts. Therefore, the ld. AO concluded that there were unexplained credits amounting to Rs.3 Crores in the audit report, which is based on the books of accounts and therefore, the provisions of section 68 were attracted. The ld. AO, thereafter, made an addition of Rs.3 Crores under section 68 of the Income Tax Act and initiated penalty proceedings under section 271(1)(c) of the Act. ITA No.518/LKW/2017 M/s Narain Institute of Management Studies Pvt. Ltd. A.Y. 2009-10 3 3. Aggrieved by this addition, the assessee went in appeal to the ld. CIT(A)-2, Kanpur on a number of points. On the issue under question, it was submitted that the assessee only had sundry creditors amounting to Rs.34,87,504/- as per its books of accounts, which had been duly audited and the audited balance-sheet which was based upon the books were submitted at the time of filing the original return electronically. It argued that the addition of Rs.3 Crores had been made on the basis of a tampered balance-sheet, which had been developed by someone who wished to damage the assessee. It was submitted that during the first assessment under section 143(3), the hard copy of the original balance-sheet had been submitted and this matched with the data of the balance-sheet that had been filed initially with the return of income. It was also submitted that the books of accounts had been presented before the ld. AO in such proceeding. Therefore, it was submitted that this original balance-sheet showing a credit of Rs.34,87,504/- was the only balance-sheet on record at that point of time. It was further submitted that against the said order under section 143(3) dated 26.12.2011, the assessee had filed an appeal before the ld. CIT(A) and on that occasion also it produced its’ books of accounts. From the same, the assessee submitted that till the finalization of the above said proceedings, no other balance-sheet than its original balance-sheet was available on record. The ld. AO submitted that had there been creditors suppressed to the extent of Rs.3 Crores in the books of the assessee, the same would have shown up during these proceedings. The assessee further contested the fact that its Auditor, Sh. R.S. Tiwary had confirmed either verbally or in writing the fact that its sundry creditors were Rs. 3,34,87,504/-. It was submitted that the ld. AO had failed to investigate or bring any concrete material or such evidence on record that showed that the assessee has excess credit of Rs. 3 Crores. The addition had been made purely on the basis of a tampered balance-sheet, which had not been part of the audited books of accounts. It was submitted that the ld. CIT-2, Kanpur and ld. AO had not discussed anywhere in the body of the order, the sources and circumstances through which the second tampered balance-sheet came into their possession. It was submitted that in order to accommodate tampered entry of Rs. 3 Crores, certain other ITA No.518/LKW/2017 M/s Narain Institute of Management Studies Pvt. Ltd. A.Y. 2009-10 4 changes had also been made in the second balance-sheet. It was submitted that since the second balance-sheet was not supported by the books of accounts of the company, the inference drawn by the ld. AO was unjustified and his order deserve to be deleted. 4. The ld. CIT(A) perused the original return of income tax and the audit report filed alongwith and observed that the data of hard copy of balance-sheet filed at the time of the first regular assessment dated 6.12.2011 tallied with the data of balance- sheet uploaded with the return of income. He also found that no other information or other documents were placed on record till the completion of the first round of assessments, which could show that the assessee had inflated sundry creditors to the tune of Rs.3 Crores. He also observed that the ld. AO had not brought any such material or evidence on record to show that the assessee had introduced bogus creditors corresponding to the value of assets that had increased by the same amount in round figures. He also observed the grand total of both sides of this tampered balance-sheet did not tally under the head, “source of fund” and, “application of fund”. The ld. CIT(A) observed that the ld. AO had not brought on record any information as to where this duplicate balance-sheet came on to the records from. He also held that the ld. AO had made addition under section 69C, while accepting that the provisions of section 68 were attracted. The ld. CIT(A) noted that it was clear on comparison of both balance- sheets that there was an exact difference of Rs.3 Crores in the same. However, while fabricating the original balance-sheet, the total sources of funds and application of funds that were tallying at Rs.20059681.76/- was ignored and while total source of funds was left at the original figure but the total application of funds were shown at Rs. 5,80,79,914.70/- by simply adding the 3 Crores. Thus, these facts clearly indicated that the subsequent balance-sheet had no base and was not supported by any books of accounts of the company. Therefore, he deleted the addition made by the ld. AO. 5. The Department is aggrieved with this decision of the ld. CIT(A). Sh. Sanjeev Krishna Sharma, ld. Sr. DR appearing on behalf of the assessee produced before us the assessment record which showed that the so called “tampered balance-sheet” had ITA No.518/LKW/2017 M/s Narain Institute of Management Studies Pvt. Ltd. A.Y. 2009-10 5 been filed under the signature of Director of the company during the course of proceedings, by the assessee itself. It was, therefore, submitted that the entire basis of the ld. CIT(A’s) arguments that the Department had somehow surreptitiously introduced this tampered balance-sheet was an incorrect assumption. The ld. Sr. DR further pointed out that the ld. CIT(A) was completely incorrect in appreciation of the fact that the ld. AO made the addition against the assessee under section 69C. He took us through the last paragraph of the assessment order wherein it was clearly written that the addition was being made under section 68. Therefore, he submitted that the decision taken by the ld. CIT(A) was on two fundamental misconceptions of facts. The ld. Sr. DR also drew attention to ground no.1 of the appeal and explained that all that the Assessing Officer was trying to say in the course of the assessment proceedings was that, as balance-sheets have to tally on both sides and the assessee had suppressed its balance-sheet by Rs.3 Crores on the credit side, it is logical to conclude that the assets had been understated by the same amount. The ld. Sr. DR submitted that the ld. CIT(A) had totally ignored the fact that the balance-sheet showing credit of Rs.3,34,87,504/- was matching in totality on both sides, which ruled out any typographical error in the said balance-sheet. He submitted that the ld. CIT(A) had also ignored the fact that in the tax audit report of the assessee company, current liabilities and provisions have been shown amounting to Rs.6,03,07,300/- which could only be the case, if the creditors were considered at Rs.3,34,87,504/-. Accordingly, the submitted that the ld. CIT(A) was completely wrong in granting relief to the assessee on this count and therefore, his order should be overturned. 6. On the other hand, Sh. B.P. Yadav, Advocate appearing on behalf of the assessee submitted that the assessee was a Private Limited Company which was engaged in the service sector as a service providing company. It provided training to various candidates for becoming insurance agents in programs sponsored by various insurance companies, as per rules and regulations laid down by the Insurance Regulatory and Development Authority, a Central Government Regulatory Body. It was ITA No.518/LKW/2017 M/s Narain Institute of Management Studies Pvt. Ltd. A.Y. 2009-10 6 submitted that the since the assessee was not dealing in purchase and sale of any goods, the only creditors were those who had raised invoices for supply of materials required in providing of services and to whom some payments were due. It was submitted that the entire amount under the head of Sundry Creditors i.e. Rs.34,87,504.95/- were outstanding to one party i.e. M/s Ellura Printing to whom printing jobs had been entrusted and to whom certain payments had to be made. A copy of the ledger account of M/s Ellura Printing was placed on page no. 70 of the paper book and was also brought to our attention. As against this, the company had sundry debtors amounting to Rs.63,48,601.42/-, which were primarily on account of training provided to the candidates, against which payments were due from the various insurance companies. A detailed list of the same for the financial year 2010-11 were provided on page no.69 to demonstrate the same. The ld. AR submitted that the total amount of receipts in the assessment year 2009-10 were Rs.7,60,07,724/- from training fees and Rs. 24,58,040/- from other income. The ld. AR also drew our attention to the assets existing with the company, as per the depreciation chart submitted on page no.53 of his paper book. On the basis of these, the ld. AR sought to argue that the figure of Rs.3,34,87,504.95/- simply had no basis in the accounts of the assessee and the ld. AO had not been able to show on whose account the assessee was required to make these payments. Nor had the assessee taken loans of this amount. In the absence of the AO being able to show that the assessee had any such liability on this account, there was no reason to disbelieve the submissions made by the assessee, that in fact its sundry creditors were only Rs. 34,87,504/- and not Rs.3,34,87,504/- as given in the tampered balance-sheet. It was further submitted that the ld. AO had misunderstood the statement of the Auditor. The Auditor had merely submitted that he had audited the said books of the assessee and prepared the audit report and that the balance-sheet had been prepared by him from the audited books. Nowhere had the Auditor submitted that the audit report prepared by him represented the authentic figure as emerging from the books of accounts. Accordingly, it was prayed that the book results of the assessee should not be rejected only on account of this statement of the Auditor ITA No.518/LKW/2017 M/s Narain Institute of Management Studies Pvt. Ltd. A.Y. 2009-10 7 but the excess credit entry should have been demonstrated to arise from the assessee’s books of accounts and because the ld. AO had not carried out this exercise, the assessment was bad in law. However, when it was pointed out to the ld. AR that the so- called tampered balance-sheet had been submitted by the Director of the assessee company itself in response to the notice issued, the ld. AR did not have an explanation to immediately offer and sought further time. On subsequent dates of hearing, no explanation was submitted and time petitions were filed therefore, it was decided to proceed with the matter on the assumption that no explanation was forthcoming from the side of the assessee. 7. We have duly considered the facts and circumstances of the case. It is clear from the evidences brought on record that the ld. CIT DR has made two fundamental errors while deciding the case of the assessee. The first is that he has assumed that the addition has been made by the ld. AO under section 69C, whereas in fact addition has been made under section 68. The second is that he has repeatedly pointed out that the ld. AO has not offered an explanation as to where, ‘tampered’ balance-sheet came from, when perusal of the assessment records showed that the said balance-sheet was filed by the Director of the company in response to notice issued by the Department. On account of these two fundamental mistakes, the decision of the ld. CIT(A) is vitiated and cannot be sustained. However, we observe that the mere fact that this balance- sheet was filed by the Director of the company, would not render it authentic in view of the denials, unless it could be shown that the said balance-sheet tallied with the audit report of the company and the books of the company. We also note that the order-sheet entry recording the confirmation of the Auditor, is not explicit with regard to the figure of sundry creditors and we believe that the same is required to be examined in greater depth with regard to the audit report and the books of accounts of the assessee to determine whether there was a mistake in this balance-sheet subsequently filed by the Director or whether it represented the true state of affairs of the assessee company. The ld. AR has brought on record certain documents and ITA No.518/LKW/2017 M/s Narain Institute of Management Studies Pvt. Ltd. A.Y. 2009-10 8 accounts to show that the accounts of the assessee over the years flowed naturally from one year to another and its nature of business was such that there was no scope for the assessee to suddenly generate sundry creditors to the extent of Rs.3 Crores from the line of business that it was pursuing. The ld. AO has not been able to verify this point on account of the fact that the books of accounts were not produced before the ld. AO during the second round of assessment proceedings. Considering the nature of business of the assessee and the fact that its sundry creditors were generated mainly on account of obtaining of material / facilities for rendering services, we deem it appropriate to restore this matter back to the file of the ld. CIT(A) to pass a fresh order in accordance with law after considering the arguments presented by the ld. Sr. DR and the AO as also the audit report and books of accounts of the assessee. Accordingly, the appeal of the Department is allowed for statistical purposes. 8. In the result, the appeal of the Department is allowed for statistical purposes. Order pronounced on 09.07.2025 in the Open Court. Sd/- Sd/- [KUL BHARAT] [NIKHIL CHOUDHARY] VICE PRESIDENT ACCOUNTANT MEMBER DATED: 09/07/2025 Sh Copy forwarded to: 1. Appellant – 2. Respondent – 3. CIT DR , ITAT, 4. CIT, 5. The CIT(A) By order Sr. P.S. "