Bombay High Court: Finding a Purchase Bogus Alone Doesn’t Trigger Section 69C Addition

# Case summary Court dismissed a ₹104.99 crore addition made under Section 69C and Section 115BBE for assessment year 2017-18. The court agreed with the ITAT that the statutory trigger for Section 69C was absent because the source of the expenditure was traceable through banking channels, namely Letters of Credit (LCs). The Revenue's contention that the purchases were bogus did not automatically establish an unexplained source of funds.

# Why the distinction matters Section 69C applies when an assessee ''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.'' That places the legal focus squarely on source of funds, not on whether the commercial transaction itself was genuine.

A purchase can be disputed on factual grounds (was there genuine movement of goods?) while still having a clear, traceable source of payment. If funds moved through a bank payment against an LC, the source is on record and not ''unexplained'' for purposes of Section 69C.

# Facts the court relied on The assessee had outstanding LC liabilities totaling ₹104,99,73,367 with beneficiaries including Mahip Marketing Pvt. Ltd. and Harsh Steel Thread Pvt. Ltd. The Revenue alleged the transactions were a mechanism to siphon off bank funds. The assessee produced multiple supporting documents: stock statements, MVAT records, purchaser details, corresponding sales, confirmations and details of recovery proceedings explaining the outstanding liability.

Section 69C plus taxation under Section 115BBE. The ITAT deleted the addition, and the Bombay High Court upheld that deletion, emphasizing the statutory requirement that the source must be unexplained before Section 69C can apply.

# Practical implications for taxpayers and officers If payments are routed through banks and supported by banking instruments such as LCs, the Revenue must show that the source of funds itself is unexplained. Challenging the commercial genuineness of a transaction is not enough to impose a Section 69C addition.

Tax authorities should focus on evidence that directly addresses the source of payment when considering additions under Section 69C. Conversely, taxpayers should preserve and produce banking records, trade documents, VAT and sales records, confirmations and recovery proceedings to demonstrate a traceable source.

# Short checklist for similar disputes

• Confirm whether the payment was made through a bank instrument (LC, RTGS/NEFT, cheque) and produce bank records.
• Compile trade documents that link purchases to actual stock and sales: stock registers, dispatch records, VAT filings, invoices and sales confirmations.
• Preserve communications and records of recovery proceedings if payments remain outstanding.

# Bottom line An allegation that purchases are bogus does not automatically convert the purchase amount into unexplained expenditure under Section 69C. The statutory trigger is whether the source of the expenditure is unexplained. Where bank payment mechanisms provide a traceable source and the assessee produces corroborative documents, Section 69C additions are vulnerable to challenge.