Recorded banked expenditure cannot be treated as unexplained under Section 69C merely due to vendor non-response.

ORDER

Om Prakash Kant, Accountant Member.- This appeal by the Revenue is directed against order dated 19.01.2026 passed by the learned National Faceless Appeal Centre, Delhi (hereinafter shall be referred as ‘the learned CIT(A)’) for assessment year 2023-24, raising following grounds:

2. The assessee, a public limited company engaged in logistics and delivery services, filed its return of income on 31.10.2023 declaring a loss of Rs. 5,62,27,163/-. The return was processed under section 143(1) of the Income–tax Act, 1961 (in short ‘the Act‘). Subsequently, return was selected for scrutiny and statutory notices were issued and served upon the assessee.

2.1 During the assessment proceedings, the Assessing Officer (“AO”), on the basis of GST data available through the Insight portal, noticed purchases/expenditure aggregating to approximately Rs. 14.54 crores from 49 parties identified as non-filers of returns of income prior to Assessment Year 2022-23. By notice under section 142(1) dated 05.03.2025, the assessee was required, inter- alia, to furnish the particulars of the parties, PAN, GSTIN, purchase invoices, GST returns(GSTR-2A/2B), contact information and proofs of payment etc to substantiate the genuineness of the transactions. The assessee was also required to confirm whether those parties had filed income tax returns for years prior to AY 2022-23 and to provide relevant acknowledgments, if available. Additionally, a detailed explanation regarding the business necessity and justification for conducting transactions with these non-filers was sought, along with details of due diligence conducted prior to entering into such transactions.

2.2 In response to the notice dated 5th March 2025, the assessee filed detailed submissions on 13th March 2025. The information furnished included the address, PAN, and GST number of the parties, the nature of the transactions, and the status of parties with respect to whether they were “specified persons” on various dates, supported by downloaded log files from the Income Tax Reporting Portal for AY 2023-24. The assessee also furnished sample copies of invoices, copies of party ledgers (except for two parties whose transaction value was Rs. 27,920), agreements on a sample basis (except for 21 parties whose transaction value was Rs. 1,38,99,140), and extracts of bank statements on a sample basis evidencing payment through banking channels.

2.3 The ld AO thereafter issued notices under section 133(6) to the concerned parties, seeking verification of transactions and confirmation of their tax compliance status. The ld AO noted that the majority of those parties did not respond to the notices. Five parties responded, involving transactions of Rs.36,29,079/-, whereas the remaining 44 parties did not respond. A show-cause notice dated 18.03.2025 was thereafter issued proposing an addition of Rs. 14,53,97,436/- under section 69C. After considering the assessee’s reply, the AO, by order dated 27.03.2025 passed under section 143(3) read with section 144B, restricted the addition to Rs. 10,08,86,697/- under section 69C. The total assessed income was consequently determined at Rs. 10,08,86,697/- as against the returned loss of Rs. 5,62,27,163/-.

2.4 The learned AO made the addition under section 69C of the Act on grounds, Firstly, the assessee failed to establish the credibility and tax compliance status of the vendors with whom transactions were conducted, (ii) Secondly, despite issuance of notices under section 133(6), the majority of the vendors did not respond, leaving the genuineness of transactions unverified and (iii) thirdly, the assessee did not furnish conclusive evidence to support the genuineness and necessity of the transactions, nor did it substantiate the nature and purpose of the expenditures claimed.

2.5 The learned AO, in the assessment order, observed that any expenditure, including purchases from unverifiable, non-compliant, or unresponsive parties, where the genuineness remains unsubstantiated, is liable to be disallowed. Accordingly, the entire transaction amounting to Rs. 10,08,86,697/- was added to the total income of the assessee as unexplained expenditure under section 69C of the Act. The AO relied on judicial precedents holding that transactions lacking independent verification, vendor identity confirmation, and proof of tax compliance can be disallowed and added back to taxable income.

3. On appeal, the learned CIT(A) deleted the addition of Rs. 10,08,86,697/- under section 69C. He recorded that (i) the disputed expenditure was duly accounted for in the assessee’s audited books, which had not been rejected,;(ii) the corresponding payments had been made through banking channels and (iii) the assessee had furnished invoices, ledger accounts, agreements, PAN and GSTIN particulars of the parties, bank statements, GST records, AIS extracts and Income–tax Reporting Portal data. In his view, section 69C is attracted only where the source of expenditure remains unexplained; mere doubts regarding the genuineness of expenditure, or non-response of vendors to notices under section 133(6), do not by themselves establish that the source of the expenditure was unexplained.

3.1 The ld CIT(A) observed that the AO questioned the authenticity and genuineness of the expenditure on the grounds that (i) Vendors did not respond to section 133(6) notices; (ii) Credibility of vendors was allegedly not established; (iii_ Some ITR acknowledgements of vendors were not furnished. The ld CIT(A) referred to the decision of Hon’ble Delhi High Court in CIT v. Radhika Creation  138 (Delhi) where it is held that the Section 69C focuses on the “source” of expenditure and not its authenticity. Expenditure recorded in the regular books of account satisfies the requirement of explaining the source, and such expenditure cannot be treated as unexplained merely because the Assessing Officer questions the authenticity of vouchers.

3.2 The ld CIT(A) noted that the Section 69C applies to unexplained expenditure where the source is not satisfactorily explained, whereas section 37(1) deals with disallowance of expenditure which is not wholly and exclusively for business purposes, or whose genuineness is doubted. He observed that in the present case, if the AO wanted to question the genuineness of the expenditure, the proper course would have been to consider disallowance under section 37(1), not section 69C. The ld CIT(A) further observed that even assuming, for the sake of argument, that the AO was justified in questioning the genuineness of expenditure (though the correct provision would be section 37(1)), the question arises whether the assessee has discharged its burden of proving the genuineness.

3.3 The ld CIT(A) referred to the decision of the Hon’ble Supreme Court in CIT v. Orissa Corporation Pvt. Ltd.  159 ITR 78 (SC) , wherein it is held that Once the assessee furnishes the name, address, PAN and other details of the parties and produces evidence of transactions, the initial burden is discharged and thereafter, the burden shifts to the Revenue to disprove the transactions with positive evidence. The ld CIT(A) noted that in the present case, the assessee had furnished substantial evidence, which includes (a) Primary Documentary Evidence: (i) Invoices raised by all 49 parties; (ii) Ledger accounts of 47 parties (except 2 parties with transaction value of Rs. 27,920); (iii) Bank statements evidencing payments through banking channels; (iv) Copies of agreements with 28 parties (except 21 parties with transaction value of Rs. 1,38,99,140); (b) Third-Party Verification Documents: (i) PAN and GSTIN of all 49 parties; (ii) Address and contact details; (iii) ITR acknowledgements/returns of some parties;)iv) Certificate of Incorporation and Financial Statements of corporate entities from MCA portal; (c) Statutory Records: (i) GST returns (GSTR-2B) of the assessee showing invoices uploaded on GST portal; (ii) AIS extracts showing transactions reflected under the PAN of the appellant; (iii) Log files from Income Tax Reporting Portal showing majority of parties were not “Specified Persons” under section 206AB during the relevant period.

3.4 According the ld CIT(A) concluded that above evidence establishes: (i) Identity of parties: All parties have PAN and GSTIN; some are incorporated corporate entities; (ii) Genuineness of transactions: Invoices raised and uploaded on GST portal, transactions reflected in AIS, payments made through banking channels; (iii) Tax compliance of parties: Log files show most parties had filed ITRs for preceding two years and were not “Specified Persons.”

3.5 The ld CIT(A) observed that the AO’s primary basis for the addition is that majority of parties did not respond to section 133(6) notices, concluding that genuineness and identity of suppliers cannot be verified The ld CIT(A) found that the approach of AO was contrary to well-settled law. He was of view that non-response to section 133(6) notices alone cannot justify disallowance when the assessee has furnished substantial documentary evidence. He relied on the decision of Hon’ble Supreme court in the case of Orissa Corporation Pvt. Ltd.(supra) and held that nonresponse to section 133(6) notices cannot be the sole basis for treating expenditure as unexplained when the assessee had furnished substantial documentary evidence including invoices, ledgers, bank statements, GST returns, AIS extracts, agreements, and verification documents. He accordingly held that the assessee had discharged its initial burden by furnishing substantial documentary evidence.

3.6 The ld CIT(A) noted that in the present case, the learned AO has not brought any positive evidence to disprove the transactions. Enquiry or investigation conducted was not sufficient. The AO relied solely on non-response to section 133(6) notices. He observed that out of 49 parties, 5 parties responded to the notices under section 133(6), accounting for transactions of Rs. 36,29,079/-. But, the AO did not make any adverse comment regarding these responses, confirming that where parties responded, transactions were found in order. For the remaining 44 parties, the AO should have conducted further enquiries, such as: (i) Verification of PAN and GSTIN; (ii) Checking ITR filing status from departmental records;(iii) Verifying GST returns filed by the parties; (iv) Conducting field enquiries at the addresses furnished; (v) Issuing summons under section 131 for personal appearance. The ld CIT(A) observed that no such efforts were undertaken. He held that in those circumstances, addition cannot be sustained merely on the basis of non-response to section 133(6) notices. The CIT(A) found the enquiry by the AO as insufficient because the AO essentially relied upon the non-response without bringing further positive material on record to discredit the transactions.

3.7 The learned CIT(A) further observed that the assessee’s business of logistics and delivery services necessarily involved expenditure on transportation, manpower and allied operational services, and that the corresponding business receipts had not been doubted.

3.8 The ld CIT(A) further referred to the Section 206AB, which defines a “Specified Person” as one who has not filed ITR for two preceding assessment years and TDS/TCS is Rs. 50,000 or more in each year. The ld CIT(A) noted that the assessee furnished log files from the Income Tax Reporting Portal during FY 2022-23 and out of 49 parties, 45 parties were not Specified Persons, meaning they had filed ITRs for the preceding two assessment years whereas only 4 parties (including Go Airlines, liquidated under IBC) were Specified Persons at some point. The ld CIT(A) observed that the fact of verifying specified person status of those parties demonstrates that the assessee exercised due diligence before entering into transactions, verifying the specified person status from official Income Tax portal. He observed that even if a few parties did not file returns for AY 2022-23 or AY 2023-24, they had complied in earlier years, invalidating the AO’s allegation that these parties are nonfilers.

3.9 He accordingly held that the addition under section 69C was unsustainable and deleted the same in full concluding as under:

” 8.26.1 After considering the detailed submissions of the appellant, the findings of the learned AO, the material on record, and the judicial precedents cited by both sides, the following conclusions are reached:

(a) Section 69C Not Applicable:

Section 69C deals with unexplained expenditure where the source of expenditure is not explained. In the present case, all expenditure is duly recorded in audited books of account and payments are made through banking channels. The source of expenditure is clearly explained. Therefore, Section 69C is not applicable. The proper provision, if at all the genuineness of expenditure were to be questioned, would be Section 37(1). The learned AO, however, has invoked Section 69C, which is a wrong provision.

(b) Genuineness of Expenditure Established:

Even on merits, the appellant has discharged its burden of proving the genuineness of expenditure by furnishing invoices raised by all parties, ledger accounts of parties, bank statements showing payments through banking channels, copies of agreements, GST returns showing invoices uploaded by parties, AIS extracts showing transactions appearing under appellant’s PAN, log files showing specified person status, and PAN and GSTIN of all parties. The learned AO has not brought any positive evidence to disprove the transactions, except relying on non-response to Section 133(6) notices, which is insufficient when substantial documentary evidence has been furnished.

(c) Non-Response to Section 133(6) Not Determinative

As held by the Hon’ble Supreme Court in Orissa Corporation and by the Hon’ble Bombay High Court in Nikunj Eximp Enterprises, non-response to Section 133(6) notices, by itself, cannot be the basis for making additions when the assessee has furnished substantial documentary evidence.

(d) Business Necessity Established:

The appellant is engaged in the business of logistics services, which requires hiring of transport vendors and manpower agencies. The expenditure in question is essential for the business. The revenue earned by the appellant has not been doubted. If services were rendered and revenue was earned, the related expenditure must have been incurred.

(e) GST Compliance and AIS Data:

All invoices have been uploaded on the GST portal by the parties and are appearing in the AIS of the appellant. This is a strong indicator of the genuineness of transactions. The learned AO cannot selectively rely on government portal data that supports the Revenue while ignoring other government portal data that supports the appellant.

(f) Specified Person Status:

The fact that 45 out of 49 parties were not “Specified Persons” during the relevant period shows that they had filed their returns for the two preceding years. This demonstrates due diligence by the appellant in entering into transactions.

(g) No Independent Investigation:

The learned AO has not conducted any independent investigation to verify the transactions. In the absence of any positive evidence brought by the Revenue, the addition cannot be sustained.

(h) Jurisdictional Precedents:

The decisions of the Hon’ble Bombay High Court in Jagdish Thakkar, Sanjay Dhokad Chawla Interbild Construction, and the decision of the Hon’ble Supreme Court in Century Plyboards squarely support the case of the appellant.

8.26.2 In view of the above detailed discussion and analysis, the addition of Rs. 10,08,86,697/- made by the learned AO under Section 69C of the Act is not sustainable in law or on facts. The same is hereby deleted in full.

8.26.3 The grounds of appeal Nos. 3 to 7 are accordingly allowed.”

4. Before us, the learned Departmental Representative (DR) submitted that the concerned parties had not complied with notices issued under section 133(6), that several of them were non-filers of returns of income and that the assessee had failed to produce them for verification. According to him, the assessee had therefore failed to discharge its burden of establishing the genuineness of the transactions and the addition under section 69C was justified.

5. Per contra, the learned counsel for the assessee filed a paper book containing pages 1 to 664 and submitted that the assessee had furnished the particulars of all the parties, their PAN and GSTIN, invoices, ledger accounts, agreements and bank statements. He submitted that the assessee cannot have control as those persons would file the return for year under consideration. It was submitted that the assessee had duly verified the specified person status of the parties on the Income–tax portal, the relevant transactions were recorded in the books and payments were made through banking channels. Regarding non-compliance by third parties with notices issued by the AO, it was submitted, that the assessee could not be held responsible, particularly when the AO had not brought any positive material to establish that the expenditure was fictitious or that the payments emanated from unexplained sources.

5.1 Further, regarding the ground No. 3 raised by the Revenue that procedure under Rule 46A has not been complied with in respect of the additional evidence, the learned counsel for the assessee submitted that no additional evidence had been filed before the learned CIT(A) and therefore invoking of Rule 46A of the Income–tax Rules did not arise. Further, the learned counsel submitted that the expenditure claimed has been duly entered into the books of account and source of the same is also explained from the books of account and therefore no disallowance could be made under section 69C of the Act. On this ground also the addition is not warranted. Learned counsel for the assessee relied on the order of the learned CIT(A).

6. We have heard rival submissions of the parties and perused the relevant material on record. As regard to the ground raised on the merit is concerned, we find that assessee has transacted with 49 parties which were identified by the Assessing Officer as nonfilers. The Assessing Officer issued notice under section 133(6) of the Act to all those parties, out of which 44 parties did not comply and accordingly the Assessing Officer made addition in respect of the expenditure incurred in respect of these 44 parties. Thus the sole premise of the Assessing Officer for making addition is, firstly, non-filing of return of income by them, and secondly, noncompliance of the notice under section 133(6) of the Act.

6.1 Before analysing arguments of parties and material on record, we find it appropriate to notice the legal position governing section 69C. In Radhika Creation (supra), the Hon’ble Delhi High Court held that section 69C is concerned with the source of expenditure and that questioning the authenticity of expenditure recorded in the books is distinct from questioning its source. Likewise, in Pr. CIT v. Jagdish Thakkar  (Bombay), the Hon’ble Bombay High Court held, in the context of disputed purchases, that where the assessee had discharged its initial burden and the Assessing Officer had not brought positive material to establish that the expenditure was bogus, the case did not fall within the ambit of section 69C.

6.2 In CIT v. Orissa Corporation (P.) Ltd.  159 ITR 78 (SC), the Hon’ble Supreme Court held that where the assessee had furnished the names and addresses of the concerned persons and the Revenue, despite having the relevant particulars, did not pursue the matter further, the assessee could not be expected to do more; the burden stood discharged in the circumstances of that case.

6.3 The principle has also been applied by the Hon’ble Bombay High Court in CIT v. Nikunj Eximp Enterprises (P.) Ltd. [2013] 35  [2015] 372 ITR 619 (Bombay), where the Court held that merely because suppliers had not appeared before the AO or the CIT(A), it could not, in the facts of that case, be concluded that the purchases were not made, particularly when the books had not been rejected and invoices and bank statements supported the transactions.

6.4 More directly, in Pr. CIT v. Sanjay Dhokad 456 ITR 77 (Bombay), the Hon’ble jurisdictional High Court considered an addition under section 69C and approved the deletion where the assessee had furnished documentary material concerning the transactions, payments had been made through banking channels, the books had not been rejected and the Assessing Officer had not undertaken the necessary enquiry to discredit the evidence.

6.6 The decision in CIT v. Odeon Builders (P.) Ltd.  418 ITR 315 (SC) is also instructive. The Hon’ble Supreme Court, while dismissing the Revenue’s review petitions, noted that the disallowance had rested solely on third-party information which had not been subjected to independent verification, whereas the assessee had furnished documentary material supporting the purchases.

6.7 The section is attracted where the assessee has incurred expenditure but offers no explanation regarding its source, or where the explanation regarding such source is found unsatisfactory. In the present case, the expenditure was admittedly recorded in the assessee’s books of account; the books were not rejected; and the payments were made through banking channels. The AO has not brought on record any material to show that the payments were made out of funds outside the books or that the source of the payments remained unexplained.

6.8 The question whether the transactions were genuine is undoubtedly relevant where the Revenue seeks to disallow the expenditure on that ground. But a finding that a vendor did not respond to a notice under section 133(6) does not establish either that the expenditure was fictitious or that its source was unexplained.

6.9 The assessee had furnished the identity particulars of the 49 parties, including PAN and GSTIN, invoices, ledger accounts and bank-payment details. It had also furnished GST records, AIS extracts and the Income–tax Reporting Portal data relating to the status of the parties. The assessee’s case that the transactions were part of its ordinary logistics and delivery operations has also not been displaced by any contrary material. Significantly, the Revenue has not alleged that the assessee’s books were unreliable or that its business receipts or rendering of logistics services were fictitious.

6.10 The fact that some vendors may not have filed their returns for a particular assessment year stands on a different footing. A subsequent act of a third party, over which the assessee has no control, cannot by itself establish that the expenditure incurred by the assessee in the course of its business was fictitious. The assessee has further placed on record that the status of the parties had been checked on the Income–tax portal and that 45 out of the 49 parties were not “Specified Persons” during the relevant period and thereafter only services from those persons were obtained. The assessee has also filed details that the status of the ‘specified person’ was checked on the Income Tax portal many times during the year under consideration and therefore the assessee cannot be held responsible merely for non-filing of return of income by those persons in the year under consideration. It was not under control of the assessee whether they would file return of income for the assessment year 2023-24. The Assessee in its paper book has filed a chart of the parties indicating the year for which they had filed return of income. All those parties were having GST numbers and the assessee has already filed their extract of agreement, invoice, ledger account.

6.11 Further the failure of a third party to respond to a statutory notice can’t be converted into an adverse finding against the assessee without the Revenue taking the further steps available to it in law. Where the AO entertained a genuine doubt regarding particular transactions, the mere cessation of enquiry upon nonresponse to section 133(6) notices could not, in the facts before us, substitute for positive evidence establishing that the expenditure was not incurred or that its source was unexplained.

6.12 The principle emerging from Orissa Corporation (P.) Ltd. (supra), Nikunj Eximp Enterprises (P.) Ltd. (supra) and Sanjay Dhokad (supra) therefore applies with greater force where, as here, the assessee has furnished contemporaneous documentary evidence and the Revenue has not brought any independent material on record to discredit it.

6.13 We accordingly hold that the addition of Rs. 10,08,86,697/-under section 69C cannot be sustained merely on the basis of nonresponse to notices under section 133(6) and the alleged non-filing of returns by the vendors.

7. The Revenue has further alleged violation of Rule 46A on the ground that the learned CIT(A) considered additional evidence without obtaining a remand report.

7.1 We have examined the record. The learned Departmental Representative has not been able to identify any particular document which was admitted by the learned CIT(A) as additional evidence within the meaning of Rule 46A. The material considered by the learned CIT(A) was either furnished during the assessment proceedings or constituted an analysis/explanation of material already forming part of the assessment record.

7.2 Rule 46A is attracted where additional evidence is produced by the appellant before the first appellate authority and is admitted in circumstances contemplated by the Rule. In the absence of identification of any such additional evidence, the question of calling for a remand report under sub-rule (3) does not arise. Ground No. 3 is, accordingly, dismissed.

8. For the reasons set out above, we find no infirmity in the ultimate conclusion of the learned CIT(A) deleting the addition of Rs. 10,08,86,697/- under section 69C, though we do not endorse the observation that the AO had undertaken no independent enquiry. The Revenue has thus failed to demonstrate any error in the deletion of the impugned addition. The Ground Nos. 1 to 3 of the appeal are dismissed. The Ground No. 4 is general in nature and requires no separate adjudication.

9. In the result, the appeal of Revenue is dismissed.