Can Section 69C Be Invoked Merely Because Purchases Are Alleged to Be Bogus?
The Often-Ignored Difference Between a Bogus Purchase and an Unexplained Expenditure
Among the most common additions made during income tax assessments are those relating to alleged bogus purchases. Frequently, once the Department concludes that a supplier is non-genuine or that purchase bills are accommodation entries, an addition under Section 69C is made almost as a matter of routine.
However, a closer look at the language of Section 69C reveals a crucial legal distinction that is often overlooked.
Section 69C is not concerned with the genuineness of expenditure. It is concerned with the source of expenditure.
This distinction may appear subtle, but it can completely alter the tax consequences of a case.
The Mumbai ITAT, in the case of ITO v. Karsan Nandu (77 taxmann.com 275), highlighted this important principle and clarified that treating purchases as non-genuine is entirely different from holding that the source of expenditure remains unexplained.
What Does Section 69C Actually Say?
Section 69C provides that where an assessee has incurred any expenditure and offers no explanation about the source of such expenditure, or the explanation offered is not satisfactory, the amount may be deemed to be the income of the assessee.
A plain reading of the provision shows that it focuses on only one aspect:
What is the source from which the expenditure has been incurred?
The section does not use expressions such as:
• Bogus expenditure;
• Non-genuine expenditure;
• Fictitious expenditure;
• Accommodation entry expenditure.
The legislative focus is solely on the source of funds used for incurring the expenditure.
Bogus Purchase vs. Unexplained Expenditure
The two concepts are often confused, but legally they operate in completely different fields.
Bogus Purchase
A purchase may be treated as bogus when:
• The supplier is not traceable;
• The supplier denies the transaction;
• Delivery of goods is not established;
• Bills are found to be accommodation entries;
• Supporting documentation is inadequate.
In such cases, the dispute relates to the genuineness of the transaction.
Unexplained Expenditure
An expenditure becomes unexplained when:
• The source of payment is unknown;
• The assessee cannot explain where the money came from;
• The expenditure is incurred outside the recorded books;
• The funding source remains undisclosed.
This is the specific area covered by Section 69C.
Thus, the two concepts address entirely different questions.
The Critical Question Under Section 69C
Before invoking Section 69C, the Department must ask:
“From where did the assessee obtain the funds used for the expenditure?”
The question is not:
“Was the supplier genuine?”
Nor is it:
“Were the purchase bills genuine?”
Nor is it:
“Was the transaction an accommodation entry?”
These questions may be relevant for other provisions and disallowance mechanisms, but they do not automatically satisfy the conditions of Section 69C.
When Section 69C May Not Apply
Consider a typical case.
A trader records purchases in the books of account.
The purchases are reflected in:
• Purchase register;
• Trading account;
• Profit and loss account;
• Books of account.
Payment is made through:
• Banking channels;
• Disclosed bank accounts;
• Explained business funds.
Subsequently, the Department alleges that the supplier is merely a paper entity and that the purchase invoices are accommodation bills.
Even if such allegation is accepted, an important fact remains:
The source of the payment is fully explained.
The money came from disclosed bank accounts and accounted business funds.
In such a situation, the statutory requirement for invoking Section 69C may not be satisfied because the source of expenditure is neither unknown nor unexplained.
What Mumbai ITAT Held in Karsan Nandu
The Mumbai Tribunal succinctly captured this distinction.
The Tribunal observed:
“To hold the transactions as mere accommodation entries and not real purchases is quite different from saying that the sources of expenditure for the purchases have not been explained in the context of section 69C.”
This observation is significant because it separates two issues that are frequently mixed together during assessments.
The Tribunal recognized that:
• A transaction may be non-genuine;
• A supplier may be an accommodation entry provider;
• Yet the source of funds used for payment may remain fully explained.
Where the source is explained, the foundation for Section 69C becomes questionable.
Why This Distinction Matters
The distinction is not merely academic.
It has practical implications in thousands of assessment cases involving alleged hawala dealers, accommodation bills, and non-genuine purchases.
Often, the Department invokes Section 69C without separately examining whether the source of expenditure is actually unexplained.
The Tribunal’s ruling reminds us that every statutory provision has specific requirements.
Those requirements cannot be bypassed merely because another aspect of the transaction appears suspicious.
Alternative Approaches Available to Revenue
This does not mean that every bogus purchase escape taxation.
Depending on the facts, the Revenue may:
• Reject books of account;
• Estimate profit element embedded in purchases;
• Invoke other applicable provisions;
• Make trading additions;
• Disallow expenditure under appropriate sections.
However, the conditions prescribed under Section 69C must still independently exist before that section can be invoked.
The Department cannot substitute suspicion regarding genuineness for proof regarding source of expenditure.
Lessons for Taxpayers and Professionals
Whenever an addition under Section 69C is proposed in a bogus purchase case, taxpayers should carefully examine:
Was the expenditure recorded in the books?
Was payment made through disclosed sources?
Are the bank accounts explained?
Has the Revenue specifically demonstrated that the source of expenditure is unexplained?
Has the Department merely questioned the genuineness of the supplier?
The answers to these questions can significantly impact the sustainability of a Section 69C addition.
Key Takeaways
The Mumbai ITAT ruling highlights several important principles:
• Section 69C deals with the source of expenditure and not its genuineness.
• A bogus purchase and an unexplained expenditure are legally distinct concepts.
• Merely proving that a supplier is non-genuine does not automatically justify addition under Section 69C.
• If expenditure is recorded in books and paid through explained sources, the statutory requirement of Section 69C may remain unfulfilled.
• The Revenue must independently establish that the source of expenditure is unexplained.
• Suspicion regarding purchases cannot substitute the specific conditions prescribed under the statute.
Conclusion
The tendency to invoke Section 69C in every bogus purchase case deserves careful scrutiny. The law does not permit additions merely because a transaction appears doubtful or because a supplier is alleged to be a hawala operator.
Section 69C has a specific and limited scope. It applies where the source of expenditure remains unexplained. It does not apply merely because the expenditure itself is alleged to be non-genuine.
The Mumbai ITAT’s ruling in ITO v. Karsan Nandu serves as an important reminder that tax assessments must be based on the precise language of the statute. Before invoking Section 69C, the real question is not whether the purchase is bogus, but whether the source from which the expenditure was incurred has remained unexplained.
That distinction may appear small, but in tax litigation, it can make all the difference.
The copy of the order is as under:
