A contractor's ₹2.06 crore trade-creditor addition under Section 68, and an 8% profit estimate on top of it, have both been deleted by ITAT Lucknow — with a reminder that a supplier not replying to a notice isn't the same as a bogus liability.
ITAT Deletes Section 68 Addition on Trade Creditors, Rejects Profit Estimation
In Punit Goel v. ACIT-2 (ITAT Lucknow, order dated 31 August 2026, AY 2016-17), the Tribunal set aside two of the three additions made against a civil contractor operating under the name M/s Aakriti Engineers — a ₹2,06,55,949 addition under Section 68 for outstanding trade creditors, and a separate profit-estimation addition of ₹8,75,820 made after the Assessing Officer rejected the books of account. A third issue, a Form 26AS mismatch, was sent back to the AO for verification rather than decided either way.
The case is a useful reminder of a distinction that keeps coming up in assessments: the difference between a genuine trade liability arising from credit purchases and an unexplained cash credit under Section 68. The two get conflated more often than they should.
What Happened at the Assessment Stage
The assessee's turnover for the year was ₹8,22,00,228, on which the AO applied an 8% net profit rate after rejecting the books of account — citing incomplete voucher production during the assessment. That worked out to an estimated profit of ₹65,76,018, even though the assessee had already declared a profit of ₹81,09,777 — higher than what the AO's own estimation method would have produced.
Separately, the AO treated ₹2,06,55,949 of outstanding sundry creditors as unexplained cash credit under Section 68, on the ground that some suppliers did not respond to notices issued under Section 133(6) verifying their identity, creditworthiness, and the genuineness of the transactions. The CIT(A) upheld both additions on first appeal, holding that the assessee had not discharged the burden of proof under Section 68, and that an 8% net profit rate was "consistent with accepted norms" for the civil contracts business.
The core numbers
Section 68 addition (trade creditors): ₹2,06,55,949
Profit estimation addition: ₹8,75,820 (8% of turnover, vs. declared profit already higher)
Form 26AS discrepancy: ₹13,35,356 (restored to AO for verification)
The Assessee's Case Before the Tribunal
On appeal, the assessee argued that the trade creditors represented genuine credit purchases — not cash received from unidentified parties — and that Section 68 simply wasn't the right provision to invoke for that kind of balance. The AO had not made any finding that the underlying purchases themselves were bogus; the only issue was that some suppliers hadn't responded to verification notices. On the profit estimation, the assessee pointed out that 73 ledgers had already been e-filed and that the short time given during assessment proceedings didn't leave room to produce every voucher — and in any case, the profit already declared exceeded what the AO's own 8% estimate would have yielded.
What the Tribunal Held
ITAT Lucknow deleted both the Section 68 addition and the profit estimation addition, while restoring the Form 26AS discrepancy to the AO for factual verification.
On the trade creditors, the Tribunal's reasoning turned on a point that comes up in a lot of these disputes: once the AO has accepted the purchases recorded in the books — and here, there was no adverse finding that the purchases were bogus — the corresponding trade liability arising from those purchases stands accepted as well. A credit purchase creates a liability to the supplier; it isn't a cash credit received from an unknown source, so testing it against the three-part Section 68 standard (identity, creditworthiness, genuineness) is, in the Tribunal's view, the wrong lens. The bench specifically noted that the creditworthiness of the creditor is not material to establishing the genuineness of a sundry creditor balance — what matters is whether the underlying purchase was genuine, and that had not been disputed. A supplier failing to respond to a Section 133(6) notice, on its own, was held not to be a sufficient basis for treating the liability as unexplained.
On the profit estimation, the Tribunal took the view that rejecting the books simply because the assessee couldn't produce every voucher within a short compliance window was not a sound basis for rejection — particularly where the bulk of the books, including 73 ledgers, had already been filed electronically. With the books otherwise substantially available and the declared profit already exceeding the AO's own estimate, there was no case left for estimation.
The Tribunal grounded its reasoning in a line of settled authority on this distinction, including Kale Khan Mohammad Hanif v. CIT (1963) 50 ITR 1 (SC), CIT v. Banwari Lal Banshidhar (1998) 229 ITR 229 (Allahabad HC), TUV India Pvt. Ltd. v. DCIT (2019) 75 ITR 364 (ITAT Mumbai), and JCIT v. Mathura Das Ashok Kumar (2005) 101 ITD 810 (ITAT Allahabad).
"Once the appellant's purchases have been accepted by the AO, the corresponding purchases shown in his books stand automatically accepted... creditworthiness of the creditors is not material to establishing the genuineness of the sundry creditors."
— ITAT Lucknow, Punit Goel v. ACIT-2
Why This Matters Beyond This One Case
Trade creditors sitting on the balance sheet at year-end are one of the most commonly disputed items in scrutiny assessments, especially for contractors, traders, and manufacturers who routinely buy on credit. The pattern in this case is a familiar one: the AO issues verification notices to creditors, some don't reply (often because they've since wound up, changed address, or simply ignore department correspondence), and the outstanding balance gets added back as unexplained cash credit under Section 68 — even though no cash ever actually changed hands and the underlying purchase was never questioned.
The principle the Tribunal applied here — that accepted purchases carry their corresponding trade liability with them, and that a creditor's non-response isn't proof of a bogus liability — is consistent with a fairly well-established line of case law, though outcomes still turn heavily on the specific facts: whether purchases were genuinely accepted, whether there's any independent evidence of bogus billing, and how the liability is otherwise supported in the books.
On the profit-estimation side, the case is also a reminder that rejection of books under Section 145(3) needs a real defect in the books themselves — not just a compliance timeline that was too tight to produce every last voucher, especially where the bulk of records were already on file and the declared results were reasonable.
The Takeaway
If you're carrying trade creditors from credit purchases and get a notice questioning them, the strongest defence is usually the purchase itself — invoices, delivery records, and the fact that the AO hasn't disputed the purchase as bogus — rather than chasing down every supplier to respond to a department notice. And if books are rejected for incomplete vouchers, check first whether the rejection is really about a defect in the books, or just a scheduling problem during assessment.
Case: Punit Goel v. ACIT-2, ITAT Lucknow, order dated 31 August 2026 (AY 2016-17). This summary is for general information and does not constitute legal or tax advice. Please consult a qualified professional for advice specific to your facts.