₹104.99 Crore Purchase Addition Deleted: Bogus Purchase Does Not Automatically Mean Unexplained Expenditure
Bombay High Court Explains Why Section 69C Requires an Unexplained Source of Expenditure
Can an Assessing Officer treat a disputed purchase as unexplained expenditure under Section 69C merely because he believes that the purchase is not genuine?
The Bombay High Court has answered an important part of this question in the negative.
In ITA No. 232 of 2024, for AY 2017-18, decided on 31 July 2026, the Bombay High Court upheld the ITAT’s deletion of an enormous addition of ₹104.99 crore.
The central reason was simple but fundamental:
Section 69C is concerned with the source of expenditure. A finding that a purchase is bogus does not, by itself, establish that the source of the expenditure is unexplained.
The judgment is a useful reminder that tax additions must satisfy the statutory conditions of the section under which they are made.
The ₹104.99 Crore Dispute
The assessee had undertaken purchases through Letters of Credit (LCs) opened with banks.
The beneficiaries of the LCs included Mahip Marketing Pvt. Ltd. and Harsh Steel Thread Pvt. Ltd.
The Revenue alleged that the purchases were bogus and that the LC mechanism had been used to siphon off bank funds.
The assessee, however, placed substantial material before the tax authorities.
This included:
• Stock statements;
• MVAT records;
• Details of purchasers;
•Corresponding sales;
• Confirmations; and
• Details relating to recovery proceedings.
The assessee’s explanation was that the outstanding LC liability arose because the purchasers had failed to make payments.
Thus, according to the assessee, the transactions were not fictitious merely because the LC liability remained outstanding.
The AO’s Approach
The Assessing Officer did not accept the explanation.
He treated the entire outstanding LC amount of ₹104,99,73,367 as bogus expenditure.
Section 69C was invoked and the amount was also subjected to the special tax regime under Section 115BBE.
The basic allegation was that there was no genuine movement of goods and that the LC transactions were merely a mechanism for moving funds.
But there was an important statutory question:
Even assuming that the purchases were not genuine, where was the unexplained source of the expenditure?
What Does Section 69C Actually Say?
Section 69C deals with a situation where an assessee has incurred expenditure and:
“offers no explanation about the source of such expenditure or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory.”
The focus of the provision is therefore the source of expenditure.
This distinction is crucial.
Suppose an assessee purchases goods for ₹1 crore.
The Assessing Officer doubts the genuineness of the purchase.
That may lead to an enquiry into the transaction.
But a finding that the purchase documentation is questionable does not automatically answer the separate question:
“From where did the ₹1 crore come?”
If the source is identifiable and the expenditure was funded through a known banking channel, the essential condition of Section 69C may not be satisfied.
The LC Was the Missing Link
This became particularly important in the present case.
The payments were made by banks to the beneficiaries against the Letters of Credit.
Therefore, the source of the funds was not some unexplained cash lying outside the books.
The banking mechanism itself provided a traceable source.
The ITAT therefore held that the basic statutory condition for invoking Section 69C was absent.
The Tribunal’s reasoning can be reduced to one simple proposition:
If the source of expenditure is identifiable, Section 69C cannot be invoked merely because the Revenue disputes the genuineness of the underlying purchase.
Purchase Genuineness and Source of Expenditure Are Different Questions
This distinction deserves special attention.
Consider a simple example.
An assessee records a purchase of ₹50 lakh.
The supplier is later found to be suspicious or the Revenue believes that the supplier is an accommodation-entry provider.
There are at least two separate questions:
Question 1: Was the purchase genuine?
Question 2: If the assessee incurred expenditure of ₹50 lakh, what was the source of that expenditure?
The first question concerns the transaction.
The second question concerns Section 69C.
The two questions may overlap factually, but they are not legally identical.
The Department cannot automatically answer Question 2 merely by saying “Question 1 is doubtful.”
The Assessee Had Produced Supporting Evidence
The assessee did not merely rely upon the existence of the LCs.
Several other documents were produced.
The records included stock statements, MVAT information, purchaser details, corresponding sales and confirmations.
There were also recovery proceedings explaining the outstanding liability.
The assessee’s case was therefore supported by a broader documentary trail.
This was significant because the Department’s allegation was not simply that a supplier was unavailable.
The allegation went much further-it suggested that the entire transaction was part of a mechanism to siphon off bank funds.
Such an allegation requires corresponding evidence.
Where Was the Independent Enquiry?
The High Court also noted an important evidentiary deficiency.
The Revenue had alleged that the transactions were bogus and that documents such as invoices, delivery challans and lorry receipts were forged.
But the necessary independent supporting enquiry or material to establish these allegations was absent.
This is an important lesson in tax assessments.
An allegation of forgery is serious.
It cannot ordinarily be established merely by describing a document as forged.
There should be some supporting material:
• Verification from the issuing party;
• Transporter confirmation or denial;
• Stock movement analysis;
• Bank trail;
• Statements;
• Physical movement evidence; or
• Other independent corroboration.
The stronger the allegation, the stronger the evidentiary foundation required.
ITAT Deletes the Addition
The ITAT therefore deleted the entire addition.
Its reasoning was centred on the statutory requirement under Section 69C.
The source of the expenditure was identifiable because the banks had made payments to the beneficiaries against the LCs.
Therefore, the essential requirement of Section 69C was not fulfilled.
The Revenue’s case may have questioned the genuineness of the purchases, but that alone did not convert the expenditure into unexplained expenditure.
Can the Revenue Change Section 69C to Section 68?
The Revenue also attempted to sustain the addition by invoking Section 68.
This argument was not accepted.
Why?
Because the Assessing Officer had consciously made the addition under Section 69C and applied Section 115BBE.
The statutory foundation of the addition could not simply be changed subsequently to sustain the same amount.
This is an important litigation principle.
An addition is not merely a number.
It has to be supported by:
facts + evidence + statutory provision + satisfaction of the conditions of that provision.
If the conditions of Section 69C are not satisfied, the addition cannot automatically survive by shifting to another provision without establishing the ingredients of that provision as well.
A Simple Illustration
Suppose a taxpayer’s bank makes a payment of ₹10 crore under an LC to a supplier.
The Revenue subsequently alleges that the supplier’s invoice is bogus.
Even if the allegation requires serious examination, one question remains:
Was the ₹10 crore payment itself funded through an identifiable source?
If the bank records establish the payment and the books record the corresponding liability/transaction, Section 69C cannot be invoked merely because the Revenue disputes the commercial genuineness of the purchase.
There may be other consequences depending upon the facts.
But Section 69C has its own statutory ingredients.
What Taxpayers Should Learn
The case offers several practical lessons for businesses dealing with large purchase transactions.
1. Preserve the complete banking trail.
LC applications, bank correspondence, payment instructions and bank statements can be crucial.
2. Maintain stock records.
Stock statements can help establish that goods were actually dealt with.
3. Preserve tax records.
VAT/GST records, purchase registers and corresponding sales can provide independent corroboration.
4. Maintain supplier documentation.
Confirmations, invoices and agreements should be properly preserved.
5. Maintain transportation records.
Delivery challans, lorry receipts and transporter records may become important where movement of goods is questioned.
6. Explain outstanding liabilities.
An unpaid LC or trade liability does not automatically mean that the underlying transaction is fictitious.
The Bigger Lesson: Section 69C Has a Specific Job
This judgment reminds us that every deeming provision has boundaries.
Section 69C is not a general-purpose provision for taxing every purchase that the Assessing Officer considers suspicious.
It specifically addresses unexplained expenditure.
The Department therefore has to establish the statutory foundation for the provision invoked.
The distinction can be expressed in one line:
“I do not believe your purchase” is not automatically the same as “I do not know the source of your expenditure.”
Those are two different propositions.
The ₹104.99 Crore Difference
The financial impact in this case makes the principle even more striking.
An addition of:
₹104,99,73,367
was initially made.
The ITAT deleted the addition.
The Bombay High Court found no error in the Tribunal’s approach and dismissed the Revenue’s appeal.
Thus, an addition of more than ₹104.99 crore could not survive because the statutory requirement of Section 69C had not been established.
The Message Is Simple
When an Assessing Officer questions a purchase, the taxpayer should not merely defend the purchase transaction.
The taxpayer should also examine the exact statutory provision under which the addition has been made.
If Section 69C is invoked, ask:
Was expenditure actually incurred?
What was its source?
Has the source been explained?
What evidence establishes that the source is unexplained?
The Revenue may certainly investigate suspicious purchases.
But the conclusion must be supported by evidence and must satisfy the ingredients of the provision invoked.
The Bombay High Court’s decision reinforces a fundamental principle:
A doubtful purchase is not automatically unexplained expenditure.
And in tax litigation, the section under which an addition is made is not a mere heading-it determines what the Department must actually establish.
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Case at a Glance
Case: ITA No. 232 of 2024
Court: Bombay High Court
Assessment Year: 2017-18
Judgment: 31 July 2026
Addition: ₹104,99,73,367
Provision invoked: Section 69C read with Section 115BBE
Nature of transaction: Purchases through Letters of Credit
Key issue: Whether disputed/bogus purchases could automatically be treated as unexplained expenditure under Section 69C
ITAT finding: Source of funds was identifiable through banking/LC transactions; Section 69C conditions not satisfied
High Court: ITAT’s deletion upheld; Revenue’s appeal dismissed
Key principle: Genuineness of purchase and unexplained source of expenditure are distinct questions.
Disclaimer: This article is intended for general information and awareness purposes and should not be construed as professional advice. The applicability of the judgment should be examined with reference to the facts of the particular case and the law applicable to the relevant assessment year.
The copy of the order is as under:
