Section 69C IT Act | Ad Hoc Disallowance Invalid Where Audited Books Verify Genuine Purchases from Agriculturists Without PAN : ITAT Bangalore

The Income Tax Appellate Tribunal, Bangalore, has delivered a significant ruling clarifying the limits of ad hoc disallowances under Section 69C of the Income Tax Act, 1961. The Tribunal held that where an assessee maintains audited books of account, substantiates purchases with bills and quantitative records, and the Revenue does not dispute the authenticity of transactions, mere non-production of PAN details of agriculturists cannot justify arbitrary additions.

Background & Facts

The Dispute

The appellant, Dhanushree Traders, is an individual engaged in the trading of copra, an agricultural commodity, through the Agricultural Produce Market Committee (APMC) in Arsikere. The dispute arose from the Assessing Officer’s (AO) addition of ₹2,773,500 under Section 69C read with Section 115BBE, treating a portion of the assessee’s purchases as non-genuine due to the absence of Permanent Account Numbers (PAN) of certain sellers.

Key Facts

• The assessee filed its income tax return for AY 2018-19 on 08.06.2021, declaring income of ₹2,328,720.
• Total purchases during the year amounted to ₹300,172,263.
• Of this, ₹285,700,000 (approx. ₹28.57 crores) were made from registered dealers with proper invoices and PAN details.
• The remaining ₹13,867,500 were purchases made directly from 127 agriculturists/farmers at the APMC yard.
• The assessee provided bills for these purchases, recording the quantity (1,21,975 kg) and amount paid.
• PAN details of the agriculturists were not available, as they are not required to hold PAN under the Income Tax Act.
• The assessee’s books of account were audited under Section 44AB by a chartered accountant.
• Sales during the year were ₹32.18 crores, with quantitative reconciliation between purchases and sales.
• Opening and closing stock were properly accounted for and verified.
• The Revenue did not allege fabrication of records, non-maintenance of books, or mismatch in quantities.

Procedural History

• 08.06.2021: Return filed for AY 2018-19.
• 2021-22: Scrutiny notice issued; assessee submitted purchase details, bills, and bank statements.
• 2022: Show cause notice issued under Section 143(2) questioning genuineness of purchases from non-PAN holders.
• 08.06.2021: Assessment order passed under Section 143(3) read with Section 144B, adding ₹2,773,500 (20% of ₹13,867,500) under Section 69C.
• 19.02.2024: CIT(A) order passed, reducing the addition to ₹1,733,438 (12.5% of ₹13,867,500) but upholding the disallowance.
• 22.03.2024: Assessee filed application for rectification under Section 154, contending the CIT(A) order did not consider written submissions.
• 31.01.2025: CIT(A) rejected rectification application.
• 06.03.2025: Appeal filed before ITAT, Bangalore - 310 days late.
• 26.03.2026: Hearing held before ITAT.
• 15.06.2026: Judgment pronounced.

Relief Sought

The assessee sought deletion of the entire addition of ₹1,733,438 under Section 69C, arguing that the disallowance was arbitrary, unsupported by evidence, and contrary to judicial precedents. The assessee also sought costs.

The Legal Issue

The central question was whether Section 69C of the Income Tax Act permits an ad hoc disallowance of purchases merely because PAN details of agriculturist sellers are unavailable, when the purchases are recorded in audited books, supported by bills, and reconciled with sales.

Arguments Presented

For the Appellant

The authorized representative, Sri Shreehari Kutsa, argued:

• The purchases from agriculturists are genuine, as evidenced by audited books, bills, and quantitative reconciliation with sales.
• Agriculturists are not required to obtain PAN under Section 139A, and their non-possession of PAN cannot be used to infer non-genuineness.
• The Revenue has not disputed the authenticity of the bills, the identity of sellers, or the flow of funds.
• The addition of 12.5% by the CIT(A) was arbitrary, with no rational basis provided.
• Judicial precedents, including CIT v. M/s. Sree Ramaswamy Rice Mill and CIT v. M/s. K. S. R. Enterprises, hold that ad hoc disallowances are impermissible where books are audited and transactions are substantiated.
• The delay in filing the appeal was due to a bona fide attempt to seek rectification of the CIT(A) order, which constitutes sufficient cause.

For the Respondent

The Departmental Representative, Sri Subramanian JCIT-DR, contended:

• The purchases were booked on specific dates, suggesting artificial entries.
• The absence of PAN details raises suspicion about the identity of sellers.
• The AO and CIT(A) were justified in applying a percentage-based disallowance as a reasonable estimate.
• The assessee failed to provide complete documentation, and the Revenue is entitled to make an adverse inference.

The Court's Analysis

The Tribunal examined the nature of Section 69C, which allows disallowance of expenditures where the source of investment is unexplained. However, the Tribunal emphasized that Section 69C is not a tool for ad hoc disallowances where the expenditure is recorded in the books and the source is disclosed.

"The position may have been different had the Assessing Officer examined each purchase and found it to be non-genuine. However, in the present case, 20% of the purchases were disallowed despite audited quantitative records supporting the purchases and their corresponding sales."

The Tribunal noted that the Revenue did not challenge the authenticity of the bills, the volume of purchases, the reconciliation with sales, or the audit report. The mere absence of PAN from agriculturists - who are statutorily exempt from obtaining PAN - cannot be equated with unexplained investment.

The Tribunal further held that the CIT(A)’s reduction of the addition from 20% to 12.5% was arbitrary and unsupported by any reasoning. No legal or factual basis was provided for selecting 12.5% as the appropriate rate. Such percentage-based disallowances, without specific evidence of non-genuineness, violate the principles of natural justice and the requirement of reasoned orders.

The Tribunal relied on the principle laid down in CIT v. M/s. Sree Ramaswamy Rice Mill that where the assessee has maintained proper books, disclosed the source of expenditure, and the Revenue has not disproved the transactions, no addition under Section 69C is sustainable.

The Tribunal also accepted the assessee’s explanation for delay, holding that the filing of a rectification application under Section 154 constituted a bona fide attempt to remedy an error in the appellate order, and thus amounted to sufficient cause under Section 254(2).

The Verdict

The appeal of the assessee was partly allowed. The Tribunal set aside the additions made by both the Assessing Officer and the CIT(A), and directed the deletion of the disallowance of ₹1,733,438 (12.5% of ₹13,867,500). The Tribunal held that the entire addition under Section 69C was unsustainable. All other grounds were dismissed as consequential. The order was pronounced on 15.06.2026.

What This Means For Similar Cases

Ad Hoc Disallowances Under Section 69C Are Unlawful

• Practitioners must challenge any addition based solely on percentage-based assumptions where books are audited and transactions are documented.
• The burden shifts to the Revenue to prove non-genuineness with specific evidence, not general suspicion.

PAN Not Required for Agriculturists - No Adverse Inference

• The absence of PAN from sellers who are agriculturists cannot be used to infer non-genuineness of purchases.
• Section 139A(1) exempts agriculturists from PAN requirement; this is a statutory fact, not a deficiency.

Audited Books Trump Adverse Inferences

• When books are audited under Section 44AB and quantitative reconciliation exists, the Revenue cannot rely on speculative disallowances.

• Courts and Tribunals will not uphold additions where the source of expenditure is disclosed and verified through independent documentation.

• Always file rectification applications if appellate orders omit consideration of submissions - this can justify delay in filing appeals.

• In appeals, submit judicial precedents on ad hoc disallowances - Sree Ramaswamy Rice Mill and K. S. R. Enterprises are now essential references.

• Advocate for deletion of entire addition, not reduction - partial disallowances without basis are equally invalid.