The Income Tax Appellate Tribunal has clarified a critical boundary in the application of Section 69C of the Income Tax Act, holding that mere failure to produce transport documents or non-response to notices under Section 133(6) cannot justify treating recorded purchases as unexplained expenditure. This decision reinforces that the provision targets unaccounted funds, not disputed transaction authenticity.
Background & Facts
The Dispute
The assessee, Ritu Bhandula, operates a leather export business within a Special Economic Zone (SEZ). For Assessment Year 2020-21, she declared income of Rs. 7,97,270 and recorded purchases totaling Rs. 23,81,29,812 from multiple suppliers. The Assessing Officer (AO) made an addition of Rs. 2,97,66,224 under Section 69C of the Income Tax Act, treating these purchases as unexplained expenditure. The AO did not reject the books of account, nor did he identify specific unrecorded expenditures. Instead, he questioned the genuineness of transactions due to absence of transport details and non-response to notices under Section 133(6).
Procedural History
- 2021: Assessee filed return declaring income of Rs. 7,97,270
- 2022: AO completed assessment under Section 69C, adding Rs. 2,97,66,224 as unexplained expenditure
- 2024: Commissioner of Income Tax (Appeals) deleted the addition, holding that the source of expenditure was clearly recorded in books and supported by customs-verified documents
- 2025: Revenue filed appeal before ITAT; assessee filed cross objection
- 2026: ITAT heard arguments and delivered judgment
Relief Sought
The Revenue sought to restore the addition under Section 69C, arguing that absence of transport records and non-response to notices undermined transaction credibility. The assessee sought deletion of the addition, asserting that the purchases were duly recorded, audited, and independently verified by Customs authorities under SEZ regulations.
The Legal Issue
The central question was whether Section 69C can be invoked when the expenditure is duly recorded in the books of account, but the Assessing Officer questions the authenticity of the transaction due to lack of transport documentation or non-response to notices under Section 133(6).
Arguments Presented
For the Appellant (Revenue)
The Revenue contended that the assessee failed to provide transport details for most suppliers, and notices under Section 133(6) issued to creditors remained unanswered. It argued that the absence of lorry receipts and payment proofs to the transporters rendered the transactions suspicious. The Revenue relied on the remand report of the AO and the Central Scrutiny Report to assert that the CIT(A) ignored material evidence and erred in relying on SEZ customs verification as conclusive proof.
For the Respondent (Assessee)
The assessee argued that Section 69C applies only when the source of expenditure is unexplained, not when the transaction’s authenticity is doubted. She submitted audited books of account, bank statements, export invoices, shipping bills, and customs seals - all independently authenticated by Government authorities. She cited Radhika Creation and SK Integrated Consultants to establish that recorded expenditure cannot be treated as unexplained merely due to lack of transport records. She further argued that non-response to Section 133(6) notices cannot be grounds for adverse inference, as per PCIT v Wel Intertrade and Prabhat Gupta.
The Court's Analysis
The Tribunal began by examining the plain language of Section 69C, which permits the addition of expenditure only where the assessee offers no explanation about the source of such expenditure, or the explanation is unsatisfactory. The Court emphasized that the provision is not designed to scrutinize the authenticity of recorded transactions.
"Section 69C clearly stipulates that where, in any financial year, the assessee has incurred an expenditure and he offers no explanation about 'the source of such expenditure or part thereof', or the explanation, if it is offered by him, is not, in the opinion of the Assessing Officer, satisfactory, the amount covered by such expenditure or part thereof, as the case may be, may be deemed to be the income of the assessee for such financial year."
The Tribunal noted that the assessee had fully disclosed the purchases in her books of account, which were audited and not rejected. The source of funds - bank transfers to suppliers - was traceable. The Court distinguished between unexplained source (Section 69C) and unverified transaction (which falls under general evidentiary scrutiny).
It further held that reliance on SEZ customs verification was not misplaced. Customs authorities independently authenticate export transactions, including supplier details, invoice accuracy, and quantity of goods. If the purchases were fictitious, the export of goods to foreign buyers - verified by shipping bills and foreign remittances - would be impossible. The Tribunal cited Radhika Creation and SK Integrated Consultants to affirm that recorded expenditure cannot be deemed unexplained merely because transport documents are missing.
Regarding Section 133(6) notices, the Court relied on PCIT v Wel Intertrade and Prabhat Gupta, holding that non-response by creditors cannot be the sole basis for disallowance. The burden to prove falsity lies with the Revenue, not on the assessee to prove the non-existence of non-response.
The Verdict
The assessee won. The ITAT held that Section 69C cannot be invoked where the expenditure is recorded in the books of account and the source is explained. The addition of Rs. 2,97,66,224 was deleted. The Revenue’s appeal was dismissed, and the assessee’s cross objection was allowed.
What This Means For Similar Cases
Recorded Expenditure Cannot Be Treated as Unexplained
- Practitioners must argue that Section 69C is inapplicable if the expenditure is recorded in audited books, regardless of missing transport or vendor documentation
- AO’s focus must shift from transaction authenticity to source of funds - only unaccounted money qualifies
- If books are not rejected, Section 69C cannot be a substitute for general disallowance under Section 14A or Section 40A
Customs Verification in SEZs Is Sufficient Evidence
- Exporters operating in SEZs can rely on customs-verified shipping bills, export invoices, and duty drawback records as independent corroboration
- AO cannot demand transport documents as a condition precedent for accepting purchases if government authorities have already authenticated the transaction
- This creates a strong evidentiary shield for SEZ-based exporters against speculative additions
Non-Response to Section 133(6) Notices Is Not Conclusive
- Practitioners should routinely cite PCIT v Wel Intertrade and Prabhat Gupta to counter reliance on non-response by creditors
- AO must independently establish falsity or unaccounted nature of expenditure; silence of third parties is not evidence of wrongdoing
- This prevents arbitrary disallowances based on procedural non-compliance by unrelated parties
