Unexplained cash credit and ad hoc commission disallowance fail where trade liability and supporting documents substantiate the claim.

A genuine trade liability wrongly recorded as an unsecured loan does not, by itself, justify an addition as unexplained cash credit under section 68 where purchase records, ledger confirmations, bank statements and the supplier's books support the liability and subsequent payment. An ad hoc 25% disallowance of commission and brokerage was also unwarranted where the assessee furnished party details, PAN, confirmations and TDS proof, and no cogent adverse material showed the expenditure to be false or excessive. The Revenue's appeal therefore failed on both issues.

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Issues: (i) Whether the amount of Rs. 7,20,33,333 shown as unsecured loan could be treated as unexplained cash credit under section 68 when the material showed it to be trade liability / sundry creditor arising from purchases and reflected in the supplier's books. (ii) Whether the ad hoc disallowance of 25% of commission and brokerage expenditure was justified.

Issue (i): Whether the amount of Rs. 7,20,33,333 shown as unsecured loan could be treated as unexplained cash credit under section 68 when the material showed it to be trade liability / sundry creditor arising from purchases and reflected in the supplier's books.

Analysis: The assessee produced purchase records, ledger confirmations, bank statements, balance sheet extracts and other supporting material showing that the amount represented purchases and an opening balance due to the supplier. The supplier's books also reflected the corresponding amount as a sundry debtor against the assessee, and the payments were made subsequently. In these circumstances, the amount was only wrongly classified in the assessee's books as an unsecured loan, and such misclassification by itself did not establish unexplained cash credit.

Conclusion: The addition under section 68 was not sustainable and the deletion was correctly upheld in favour of the assessee.

Issue (ii): Whether the ad hoc disallowance of 25% of commission and brokerage expenditure was justified.

Analysis: The assessee had furnished party details, PAN particulars, confirmations and proof of tax deduction at source. The expenditure was consistent with the business model and there was no cogent adverse finding or independent verification showing that the claim was false or excessive. In the absence of material to discredit the claim, an estimated disallowance on a percentage basis was unwarranted.

Conclusion: The ad hoc disallowance was rightly deleted and the relief was sustained in favour of the assessee.

Final Conclusion: The additions made by the Assessing Officer were not justified on the facts found, and the Revenue's appeal failed in its entirety.

Ratio Decidendi: A mere wrong classification of a genuine trade liability as an unsecured loan does not, without more, justify an addition as unexplained cash credit; similarly, commission expenditure supported by basic documentary evidence and tax deduction cannot be disallowed on an ad hoc basis without cogent rebuttal.

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