Section 69C IT Act | Unexplained Expenditure Requires Only Source Disclosure, Not Genuineness Proof : ITAT Delhi

The Income Tax Appellate Tribunal, Delhi, has clarified a critical distinction in the application of Section 69C of the Income Tax Act, 1961: that the provision is triggered only when the source of an expenditure is unexplained, not merely because the assessing officer doubts the genuineness of the underlying transactions. This ruling reinforces the burden on the Revenue to prove lack of source, not to disprove business reality.

Background & Facts

The Dispute

The assessee, Radiate E Services Pvt. Ltd., is a private limited company engaged in digital marketing and media services. During Assessment Year 2020-21, the company declared a loss of Rs. 78,41,441 in its income tax return filed on 06.01.2022. The case was selected for scrutiny under the Computer Assisted Selection System (CASS) due to large payments made to parties who had not filed their income tax returns.

Key Facts

• The assessee made aggregate payments totaling Rs. 2,88,17,674 to four vendors: Sunil Kumar, Mahesh Kumar, Rakesh Kumar, and Expert Vision Solutions Pvt. Ltd.
• These payments were made through banking channels and were recorded in the company’s books of account
• The payments were funded from receipts received from M/s Bharti Telemedia Ltd., a legitimate client
• The assessee provided the following documentary evidence for each transaction:
  • Copy of agreements with vendors
  • Invoices issued by vendors
  • Ledger accounts reflecting entries
  • Bank payment details with TDS deduction
  • Confirmations from vendors
  • Purchase orders
  • GSTR-2A statements
  • TDS returns filed
• The Assessing Officer (AO) did not dispute the receipt of funds from Bharti Telemedia Ltd.
• The AO did not produce any incriminating evidence to show that the payments were fictitious or recycled
• The AO relied on GSTR data to question payments to Sanjay Kumar (Rs. 20,00,000), but the assessee denied any such payment, and no ITC was claimed, no expense booked

Procedural History

• 06.01.2022: Assessee filed return of income declaring loss of Rs. 78,41,441
• 28.06.2022: Notice u/s 143(2) issued
• 23.09.2022 to 16.11.2022: Multiple notices u/s 142(1) issued
• 01.12.2022: Show cause notice issued
• 20.12.2022: AO passed assessment order making additions:
  • Rs. 6,38,823 under Section 37(1)
  • Rs. 2,88,17,674 under Section 69C
• 09.04.2025: Ld. CIT(A) upheld addition of Rs. 6,38,823 but deleted Rs. 2,88,17,674 under Section 69C
• 27.01.2026: Hearing before ITAT Delhi
• 30.03.2026: Judgment pronounced

The Parties' Positions

For the Revenue (Department):

• Argued that Section 69C was correctly invoked because vendors did not file replies or ITRs
• Contended that the assessee failed to establish genuineness of transactions
• Asserted that the AO’s doubts were reasonable and supported by CASS flagging

For the Assessee:

• Argued that source of expenditure was fully explained: payments made from disclosed, recorded receipts from Bharti Telemedia Ltd.
• Emphasized that all payments were routed through banking channels with TDS compliance
• Highlighted that the AO did not dispute the origin of funds, only the compliance status of vendors
• Cited multiple precedents establishing that Section 69C requires unexplained source, not unverified vendors

Relief Sought

The Revenue sought to restore the addition of Rs. 2,88,17,674 under Section 69C and Rs. 20,00,000 under Section 37(1), arguing that the CIT(A) erred in law and fact. The assessee sought confirmation of the CIT(A)’s order deleting the additions.

The Legal Issue

The central question was whether Section 69C of the Income Tax Act, 1961 applies when the assessing officer doubts the genuineness of the expenditure or whether it is triggered only when the source of the expenditure remains unexplained despite the assessee’s explanation.

Arguments Presented

For the Appellant (Revenue)

The Department contended that Section 69C was correctly invoked because:

• None of the vendors filed replies to notices or income tax returns
• The assessee failed to establish the actual receipt of services
• The AO’s reliance on CASS data and non-compliance of vendors justified the addition
• The CIT(A) erred in disregarding the AO’s findings without independent verification
• Reliance was placed on the principle that non-cooperation by third parties raises suspicion

For the Respondent (Assessee)

The assessee argued that:

• Section 69C requires the source of expenditure to be unexplained, not the vendor’s compliance status
• The source of funds - receipts from Bharti Telemedia Ltd. - was fully disclosed, recorded, and supported by documentation
• The AO did not allege that the payments were made from undisclosed income
• The burden of proof lies on the Revenue to disprove the explanation, not on the assessee to prove vendor compliance
• Precedents such as PCIT v. Tejua Rohit Kumar Kapadia and CIT v. Odeon Builders (P) Ltd. clearly hold that mere non-filing of ITR by vendors cannot trigger Section 69C
• Suspicion, however strong, cannot substitute proof (Mehta Parikh & Co. v. CIT)

The Court's Analysis

The Tribunal undertook a detailed examination of the statutory language of Section 69C, which states: "Where any expenditure has been incurred by the assessee and the source of such expenditure is not explained to the satisfaction of the Assessing Officer, the amount of such expenditure shall be deemed to be the income of the assessee."

The key phrase is "source of such expenditure" - not the genuineness of the transaction, the vendor’s ITR status, or the vendor’s response to notices.

"The provision does not contemplate that the assessee must prove the compliance of third parties. It only requires the assessee to explain the source of the expenditure incurred."

The Tribunal noted that the AO had not doubted the origin of the funds. The payments were made from receipts received from Bharti Telemedia Ltd., which were duly recorded in the books and supported by contracts, invoices, bank statements, and TDS filings. The AO’s objections were directed at the vendors’ failure to file returns or respond to notices - not at the source of the funds.

The Tribunal emphasized that the burden of proof under Section 69C lies squarely on the Revenue to demonstrate that the source of the expenditure remains unexplained. Mere non-cooperation by vendors, without any evidence of fund recycling or fictitious transactions, is insufficient.

"The fact that the vendors did not file their returns or respond to notices does not, by itself, render the source of expenditure unexplained. The assessee has discharged its burden by providing a complete trail of funds from receipt to payment."

The Tribunal further held that the deletion of Rs. 20,00,000 was justified because the AO had relied on GSTR data which was categorically denied by the assessee, and no payment was recorded in the books, no ITC claimed, and no expense booked - meaning no expenditure existed to be disallowed.

The Tribunal relied on PCIT v. Tejua Rohit Kumar Kapadia (2018), CIT v. Odeon Builders (2019), and DSV Air & Sea v. ACIT to affirm that Section 69C cannot be invoked merely because vendors are non-compliant. The Kishinchand Chellaram v. CIT (1980) principle - that suspicion cannot replace proof - was also applied.

The Verdict

The Revenue’s appeal was dismissed. The Tribunal upheld the order of the Ld. CIT(A) dated 09.04.2025, confirming the deletion of the addition of Rs. 2,88,17,674 under Section 69C and Rs. 20,00,000 under Section 37(1). No further directions were issued as the additions were fully deleted. The order of the CIT(A) stands affirmed.

What This Means For Similar Cases

Source Must Be Unexplained, Not Vendor Compliance

• Practitioners must distinguish between doubting the vendor’s compliance and doubting the source of funds
• Section 69C cannot be invoked merely because vendors have not filed ITRs or responded to notices
• The focus must be on whether the assessee has explained the origin of the money used for the expenditure

Documentary Trail Trumps Third-Party Non-Cooperation

• Maintaining a complete audit trail - agreements, invoices, bank statements, TDS returns, and ledger entries - is decisive
• If the source of funds is disclosed and recorded, the Revenue must produce affirmative evidence of fund recycling or fabrication
• Reliance on CASS flags or vendor non-compliance alone is legally insufficient

Burden of Proof Remains on Revenue

• The Revenue must prove the source is unexplained, not merely raise suspicion

• Courts and tribunals will not uphold additions based on mechanical application of Section 69C

• Practitioners should cite Tejua Rohit Kumar Kapadia and Odeon Builders to counter speculative additions

• Always argue: "The source is explained. The burden shifts to the Revenue to disprove it."

• Never concede that vendor non-compliance = unexplained source