Rocky Menghrajmal Lakhwani Vs ITO (ITAT Ahmedabad)
Recorded Dealings Do Not Prove Unrecorded Cash Transactions: Sections 69A and 69C Require Independent Evidence
Background
The Ahmedabad Tribunal deleted additions under Sections 69C and 69A arising from alleged cash transactions recorded in a third party’s documents. It held that the Department had failed to independently establish either the incurrence of unexplained expenditure or the ownership of unexplained money by the assessee.
The Tribunal also found that the specific seized document had not been furnished to the assessee and that an effective opportunity to cross-examine the persons whose statements were relied upon had not been provided.
The assessee, an individual trading in firecrackers under the name “Rocky Traders”, had declared income of ₹4,68,050 under Section 44AD.
Information Received from the Investigation Wing
Reassessment proceedings were initiated on information gathered during search and survey proceedings involving the Ambica Fireworks Group.
Based on that information, the Assessing Officer alleged that the assessee had made an unrecorded cash purchase of ₹3,96,000 during Financial Year 2019–20. This amount was added as unexplained expenditure under Section 69C.
A further addition of ₹2,075 under Section 69A was made on account of an alleged cash receipt.
The CIT(A) confirmed the additions, observing that the assessee had not furnished crucial documentary evidence explaining the source. The assessee challenged this conclusion before the Tribunal.
Assessee’s Explanation and Objections
The assessee acknowledged regular business transactions with Ambica Ashish Tradelink LLP and furnished the relevant ledger, computation of income, Form 26AS and bank-related documents.
However, he specifically denied the alleged additional cash transactions. His principal contention was that the additions rested entirely on third-party records and statements, without independent evidence connecting him with the disputed payment or receipt.
The assessee requested the specific seized material, an opportunity to inspect it and an effective opportunity to cross-examine the persons whose statements were being used against him.
He also pointed out that the Department had not established any supporting cash trail, bank withdrawal, transportation or delivery evidence, stock discrepancy or independent confirmation.
Genuine Business Dealings Cannot Establish Additional Cash Dealings
The Tribunal held that the existence of recorded transactions with a supplier could not, by itself, establish separate unrecorded transactions.
An admitted commercial relationship is not proof of every cash allegation appearing in that supplier’s records. The alleged payment of ₹3,96,000 and receipt of ₹2,075 required their own evidentiary foundation.
The record did not demonstrate that the specific seized document containing the alleged transactions had been supplied to the assessee. Nor did it establish that effective cross-examination had been afforded despite the assessee’s request.
These deficiencies were material because the third-party records and statements formed the foundation of the additions.
Section 69C Requires Proof That Expenditure Was Incurred
The Tribunal found that the AO had not brought independent corroborative evidence establishing that the assessee actually incurred the alleged expenditure of ₹3,96,000.
There was no demonstrated cash trail, withdrawal from the assessee’s bank account, transportation or delivery evidence, stock discrepancy or independent confirmation supporting the alleged purchase.
Consequently, the addition rested substantially on uncorroborated third-party information.
The Tribunal’s reasoning places the burden in its proper sequence. Before requiring an assessee to explain the source of expenditure, the Department must first establish, through reliable evidence, that the expenditure was incurred by that assessee.
The CIT(A)’s emphasis on the absence of a source explanation could not overcome this foundational evidentiary failure.
Section 69A Requires Evidence of Ownership or Possession
The addition of ₹2,075 suffered from the same defect.
The Tribunal found no independent evidence establishing possession or ownership of unexplained money in the assessee’s hands. A disputed entry in another person’s records did not adequately establish the alleged cash receipt.
Accordingly, the addition under Section 69A was also unsustainable.
Relevance of Presumptive Taxation
The Tribunal noted that the assessee had offered income under Section 44AD on the disclosed turnover.
In these circumstances, an isolated allegation of an unrecorded purchase could not automatically be treated as unexplained expenditure. The Department still had to prove the transaction and its connection with the assessee through reliable evidence.
The order does not establish that Section 44AD creates an absolute bar against additions under Sections 69A or 69C. Its finding was that the primary burden of proving the alleged undisclosed transactions had not been discharged on the available evidence.
Decision
The Tribunal deleted ₹3,96,000 under Section 69C and ₹2,075 under Section 69A, allowing the appeal.
It further held that the consequential application of Section 115BBE and initiation of penalty under Section 271AAC did not survive.
Although the assessee had also challenged the reopening, the Tribunal’s operative reasoning granted relief by deleting the additions. It did not separately quash the reassessment notice.
Author’s Comments
The decision highlights the difference between information warranting enquiry and evidence sustaining an addition. A third-party entry may justify investigation, but it does not automatically prove expenditure or money belonging to the assessee.
Equally, presumptive taxation should not become the central defence where the real weakness is lack of evidence. The stronger point here was that the Department sought a source explanation without first establishing the disputed transaction.
The failure to supply the relied-upon document and provide effective cross-examination further weakened an already uncorroborated allegation. Recorded purchases could establish the business relationship; they could not supply the missing proof of additional cash dealings.
FULL TEXT OF THE ORDER OF ITAT AHMEDABAD
The captioned appeal has been filed by the assessee against the order passed by the Ld. Commissioner of Income Tax (Appeals), (hereinafter referred to as “Ld. CIT(A)”), National Faceless Appeal Centre (in short “NFAC”), Delhi dated 23.02.2026 under Section 250 of the Income Tax Act, 1961 arising out of the Assessment Order, dated 28.02.2025 completed under Section 147 of the Income Tax Act, 1961 [hereinafter referred to as ‘the Act’] for the Assessment Year 2020-21.
2. The assessee has raised the following grounds of appeal:
“1. General Ground
The order passed by the Learned Commissioner of Income Tax (Appeals), NFAC, u/s 250 is bad in law, contrary to facts, and liable to be set aside.
JURISDICTIONAL GROUNDS
2. The Learned CIT(A) erred in upholding the validity of reassessment u/s 147 without appreciating that the reopening was based on vague, general, and unverified third-party information without establishing a live nexus between the alleged seized material and the appellant.
3. The Learned CIT(A) failed to appreciate that no specific seized document allegedly pertaining to the appellant was ever furnished, and therefore, the assumption of jurisdiction itself is bad in law.
VIOLATION OF NATURAL JUSTICE
4. The Learned CIT(A) grossly erred in law and on facts in holding that there was no violation of principles of natural justice, despite the fact that:
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- No copy of the specific seized document relied upon was ever supplied to the appellant;
- No opportunity to inspect such material was granted;
- No opportunity to cross-examine the persons whose statements were relied upon was provided.
5. The Learned CIT(A) erred in holding that cross-examination is not mandatory, without appreciating that when third-party statements and documents are used as the sole basis of addition, denial of cross-examination renders the addition legally unsustainable.
ADDITION U/S 69C – ₹3,96,000
6. The Learned CIT(A) erred in confirming the addition of ₹3,96,000 u/s 69C without appreciating that the primary burden to prove that the appellant incurred such expenditure was never discharged by the department.
7. The Learned CIT(A) failed to appreciate that:
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- The alleged transaction is based solely on entries in third-party records;
- No independent corroborative evidence such as cash trail, bank withdrawal, transport evidence, or stock discrepancy was brought on record;
- No evidence exists to establish that the appellant actually made any cash payment.
8. The Learned CIT(A) erred in shifting the burden upon the appellant to disprove an unsubstantiated allegation, without the department first establishing the factum of expenditure.
9. The Learned CIT(A) failed to appreciate that entries in the books or loose papers of a third party cannot be treated as conclusive evidence against the appellant without independent verification and corroboration.
10. The Learned CIT(A) erred in drawing adverse inference merely because the appellant had business dealings with Ambica Group, without appreciating that admitted recorded transactions cannot justify presumption of unrecorded cash transactions.
11. The Learned CIT(A) failed to consider that the alleged seized material was never subjected to any verification such as handwriting analysis, confirmation, or confrontation, and therefore lacks evidentiary value.
PRESUMPTIVE TAXATION – SECTION 44AD
12. The Learned CIT(A) erred in not appreciating that the appellant had declared income under section 44AD, and in absence of rejection of turnover, selective addition of alleged purchases as unexplained expenditure is legally unsustainable.
13. The Learned CIT(A) failed to appreciate that under presumptive taxation, business income is determined on estimated basis and individual purchase verification is not determinative unless supported by independent evidence of undisclosed income.
ADDITION U/S 69A – ₹2,075
14. The Learned CIT(A) erred in confirming the addition of ₹2,075 u/s 69A without any evidence of possession, ownership, or unexplained money, and merely on the basis of unverified third-party entries.
115BBE & PENALTY
15. The Learned CIT(A) erred in upholding taxation under section 115BBE and consequential initiation of penalty u/s 271AAC, which are unsustainable in absence of valid additions.
PRAYER
16. The appellant prays that:
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- The reassessment be quashed;
- The addition of ₹3,96,000 u/s 69C be deleted;
- The addition of ₹2,075 u/s 69A be deleted;
- Any other relief deemed fit be granted.
LIBERTY
17. The appellant craves leave to add, amend, alter or withdraw any ground at the time of hearing.”
3. Since the above grounds involve additions under section 69C and under section 69A of the Act for the sake of brevity all the grounds are taken together.
4. The assessee is an individual engaged in the business of trading in firecrackers under the name and style of “Rocky Traders” and had declared income of Rs.4,68,050/- under the presumptive provisions of section 44AD of the Act. The reassessment was initiated on the basis of information stated to have been gathered during search and survey proceedings in the Ambica Fireworks Group. After examination of the information received from the Investigation Wing, in regard to the transaction entered by the assessee in the F.Y. 2019-20, the Assessing Officer made an addition of Rs.3,96,000/- under section 69C of the Act alleging unexplained cash purchase and a further addition of Rs. 2,075/- under section 69A of the Act on account of alleged cash receipt.
5. During the appellate proceeding, the Ld. CIT(A) confirmed the addition made by the AO in absence of crucial documentary evidences to prove the source of investment by the assessee.
6. Aggrieved by the order of the Ld. CIT(A), the assessee approached ITAT contesting the ruling of Ld. CIT(A). The principal grievance of the assessee raised before us is that the additions were made solely on the basis of third-party seized material and statements without supplying the specific seized document relied upon, without permitting inspection thereof and without granting an effective opportunity to cross-examine the persons whose statements and records were relied upon. The assessee had disclosed regular purchases from Ambica Ashish Tradelink LLP and had furnished the ledger, computation, Form 26AS and bank-related documents. The assessee specifically disputed the alleged cash payment and submitted that there was no independent evidence such as cash trail, bank withdrawal, transport or delivery evidence, stock discrepancy or confirmation establishing the alleged transaction.
7. Ld. Sr. DR relied upon the order the Ld. CIT(A) and the order of the Assessing Officer as well.
8. We have considered the rival contentions and perused the material available on record. It is evident that the foundation of the impugned additions is the alleged entry appearing in the records of a third party. The assessee had specifically requested the relied-upon material and an opportunity to cross-examine the concerned persons. The record, however, does not demonstrate that the specific seized document containing the alleged transaction was furnished to the assessee or that effective cross-examination of the persons whose statements were relied upon was afforded. The mere fact that the assessee had certain recorded business transactions with Ambica Ashish Tradelink LLP cannot, by itself, establish the alleged additional cash payment of Rs.3,96,000/- or receipt of Rs.2,075/-.
9. We further find that the Assessing Officer has not brought any independent corroborative evidence on record to establish the actual incurrence of the alleged expenditure of Rs.3,96,000/-. There is no demonstrated cash trail, withdrawal from the assessee’s bank account, transportation or delivery evidence, stock discrepancy or independent confirmation establishing that the assessee actually incurred such expenditure. The addition under section 69C of the Act therefore rests substantially upon the third-party information without the necessary independent corroboration. Likewise, the addition of Rs.2,075/- under section 69A of the Act is based upon the same third-party information without independent evidence establishing possession or ownership of unexplained money in the hands of the assessee.
10. The assessee had also offered income under section 44AD on the disclosed business turnover. In such circumstances, the isolated allegation of an unrecorded purchase cannot automatically be treated as unexplained expenditure unless the Department first establishes, by reliable evidence, the factum of such expenditure and its nexus with the assessee. On the facts available on record, we are of the considered view that the primary burden of establishing the alleged undisclosed transactions was not discharged by the Assessing Officer. Consequently, the additions of Rs.3,96,000/- under section 69C and Rs.2,075/- under section 69A cannot be sustained.
11. In view of the above discussion, we set aside the findings of the learned CIT(A) and delete the addition of Rs.3,96,000/- made under section 69C of the Act and the addition of Rs.2,075/- made under section 69A of the Act. Consequently, the consequential application of section 115BBE of the Act and initiation of penalty under section 271AAC also do not survive. The grounds raised by the assessee are accordingly allowed.
12. In the result, the appeal of the assessee is allowed.
This Order pronounced in Open Court on 07/10/2026
