Addition Under Section 69C Cannot Rest on Borrowed Satisfaction: ITAT Mumbai Draws a Clear Line
The tendency of the tax department to make additions merely on the strength of third-party investigations has once again been checked by judicial scrutiny. In a significant ruling, the Mumbai Bench of the ITAT has held that addition under section 69C for alleged bogus purchases cannot be sustained when it is based only on information gathered in the case of some other party, without any cogent evidence against the assessee itself.
Brief Facts of the Case
The assessee, Ankit Gems (P.) Ltd., was engaged in the business of import, manufacturing, and trading of cut and polished diamonds. A search and survey action was conducted in the case of one ‘BJ’, during which it was allegedly found that certain concerns were providing accommodation entries by issuing bogus purchase bills. Based on this information, the Assessing Officer reopened the assessee’s assessment under section 147, alleging that the assessee had taken bogus purchase bills from a concern named Millennium Concern.
Relying upon statements of commission agents recorded during the investigation in the BJ group and other circumstantial material, the Assessing Officer proceeded to make an addition under section 69C treating the alleged purchases as unexplained expenditure.
Assessee’s Stand and Documentary Evidence
Throughout the assessment proceedings, the assessee categorically denied having made any purchases from Millennium Concern. To substantiate its stand, the assessee produced complete purchase registers covering both periods-when it was a partnership firm and when it was converted into a private limited company. A critical fact emerged from these records: there was not a single entry reflecting any purchase from Millennium Concern.
Despite this, the addition was sustained by the Assessing Officer and later by the Commissioner (Appeals), solely on the basis of findings recorded during the search and survey in the case of another group.
Core Issue Before the Tribunal
The central question before the Tribunal was whether an assessee can be subjected to addition under section 69C merely on the basis of third-party investigation material, when there is no direct evidence on record to show that the assessee actually incurred such expenditure or entered into such purchase transactions.
Findings of the ITAT
The Tribunal took a firm and reasoned view in favour of the assessee. It noted that the entire foundation of the addition rested on material gathered in the case of a third party, without any independent verification or corroboration in the assessee’s own case. There was no documentary evidence, no purchase entry, no payment trail, and no material directly linking the assessee with Millennium Concern.
The ITAT observed that the assessee was effectively being asked to prove a negative-that it had not made purchases from the alleged concern. Law does not require an assessee to prove non-existence of a transaction which is not reflected in its books, particularly when the department itself fails to bring any tangible evidence to the contrary.
Legal Principle Reaffirmed
The Tribunal categorically held that addition under section 69C requires positive evidence of unexplained expenditure incurred by the assessee. Suspicion, surmises, or borrowed satisfaction based on investigations in someone else’s case cannot substitute proof. Unless the Assessing Officer is able to demonstrate, with cogent material, that the assessee actually made the alleged bogus purchases, no addition can be sustained.
Accordingly, the addition made under section 69C was deleted in full.
Significance of the Ruling
This decision is an important reaffirmation of a settled principle: each assessment must stand on its own facts and evidence. Information from third-party searches may trigger inquiry, but it cannot, by itself, justify an addition. The burden lies squarely on the department to establish a live nexus between the assessee and the alleged bogus transaction.
For taxpayers and professionals dealing with bogus purchase allegations, this ruling provides strong support against arbitrary additions based solely on investigation reports of other parties.
Citation:
Income Tax Appellate Tribunal Mumbai
Ankit Gems (P.) Ltd. vs. Income-tax Officer
[2025] 178 taxmann.com 454 (Mumbai – Trib.) | Order dated 28-08-2025
The copy of the order is as under:
