Kolkata ITAT Deletes ₹38.95 Lakh Section 69C Additions on Documentary Evidence

Mrignayani Cosmetics Private Limited Vs ITO (ITAT Kolkata)

Vendor’s Non-Response Cannot Make Genuine Payment Bogus; Purchase Neutralised by Closing Stock Cannot Be Added Under Section 69C: ITAT

Summary: The Kolkata Bench of the Income Tax Appellate Tribunal has deleted additions aggregating to ₹38,95,275 under Section 69C, holding that an assessee cannot be penalised merely because its vendor failed to respond to a notice under Section 133(6), particularly when the assessee had produced invoices, bank statements, TDS details, GST records and audited books. The Tribunal further held that no addition could be made for purchases which remained in closing stock and were returned in the succeeding year. Since the purchase debit was fully neutralised by the corresponding credit to closing stock, the transaction had a nil impact on taxable income.

Facts of the case

The assessee-company was engaged in construction and real estate. It filed its return for Assessment Year 2018-19 declaring total income of ₹1,80,280.

Based on information received through the Insight Portal, the Assessing Officer alleged that the assessee had entered into bogus transactions with two concerns:

• labour and manpower services of ₹13,44,000 from M/s Barbarik Consultancy Private Limited; and
• purchases of ₹25,51,275 from M/s Saraff Enterprises.

Proceedings under Sections 148A and 148 were initiated. Although the assessee filed a return in response to the Section 148 notice, the Tribunal noted that the assessment order did not acknowledge that return.

The Assessing Officer ultimately treated both amounts as unexplained expenditure under Section 69C.

Labour and manpower charges of ₹13.44 lakh

The assessee explained that Barbarik Consultancy had provided labour and manpower services for its construction projects. It furnished invoices, the vendor’s ledger account, bank statements, TDS details, GST returns and audited financial statements.

The payment had been made through regular banking channels after deducting TDS of ₹26,880. The corresponding invoices had been uploaded by the vendor and were reflected in the assessee’s GSTR-2A. The assessee also demonstrated that the source of the payment was its revenue from operations of ₹2,67,71,929, duly credited to the profit and loss account.

The Assessing Officer nevertheless doubted the transaction because Barbarik Consultancy had reportedly issued fake invoices to other entities, had nominal share capital, paid insignificant taxes and had subsequently been struck off. Further, the concern did not respond to the notice issued under Section 133(6).

The CIT(A) confirmed the addition of ₹13,44,000.

Non-compliance by vendor not sufficient to reject evidence

The Tribunal observed that the assessee had furnished all the primary documentary evidence within its control. The Assessing Officer did not find any specific defect in the invoices, bank transactions, TDS compliance, GST records or audited accounts.

The vendor had already been struck off. Its failure to respond to the Section 133(6) notice could, therefore, be understood in that context. More importantly, non-compliance by a third party could not by itself render an otherwise documented transaction non-genuine.

The Assessing Officer had rejected the evidence without carrying out any meaningful further enquiry.

Relying on the Supreme Court’s decision in CIT v. Orissa Corporation Private Limited (1986) 159 ITR 78, the Tribunal held that once the assessee furnishes the relevant particulars and supporting evidence, the Revenue must pursue the enquiry. The assessee cannot be expected to compel an independent third party to respond to departmental notices.

Accordingly, the addition of ₹13,44,000 was deleted.

Purchases of ₹25.51 lakh returned in subsequent year

Regarding Saraff Enterprises, the assessee admitted that goods worth ₹25,51,275 had been purchased during the relevant year. However, the goods remained unsold and formed part of the closing work-in-progress. They were returned to the supplier during Financial Year 2018-19, and no payment was made.

The accounting entries showed that the purchase was debited to the profit and loss account, while the unsold goods were correspondingly credited as closing stock. The computation of the cost of goods sold included:

• opening work-in-progress of ₹2,32,40,327;
• purchases from Saraff Enterprises of ₹25,51,275;
• other purchases and direct expenses; and
• closing work-in-progress of ₹2,84,08,224.

Thus, the purchase from Saraff Enterprises had a nil net effect upon the assessee’s income.

The assessee also produced the purchase-return ledger, debit note and GST returns for the succeeding year. The input tax credit relating to the purchase was reversed when the goods were returned. Significantly, the Department had accepted the purchase return in the assessment for Assessment Year 2019-20.

ITAT deletes the second addition

The Tribunal found that:

• no payment had been made to Saraff Enterprises;
• the goods remained in closing stock at year-end;
• the purchase debit was neutralised by the corresponding closing-stock credit;
• the goods were returned in the succeeding year;
• the related GST input credit was reversed; and
• the Department had accepted the return transaction in the succeeding assessment year.

Therefore, there was neither any unexplained outflow nor any deduction that had reduced the assessee’s taxable income. The Tribunal found no justification for sustaining the addition and deleted ₹25,51,275.

The assessee’s appeal was allowed in full.

Author’s comments

The ruling illustrates two distinct but important principles governing additions under Section 69C.

First, an addition cannot be sustained solely because a supplier fails to comply with a notice under Section 133(6). The assessee’s responsibility is to furnish credible evidence within its possession and control. It cannot guarantee the subsequent conduct of an independent vendor. However, payment through banking channels, TDS deduction or reflection in GSTR-2A may not individually prove genuineness in every case. Relief was granted here because these factors existed cumulatively and the Assessing Officer failed to controvert them through further investigation.

Secondly, Section 69C concerns unexplained expenditure. Where no payment is made and a purchase remains in closing stock, the debit and credit entries may neutralise each other for profit computation. If the goods are subsequently returned and the GST credit is also reversed, an addition of the purchase amount would artificially increase taxable income without any corresponding economic or accounting basis.

The CIT(A) had restored the Saraff Enterprises issue to the Assessing Officer for fresh verification. The assessee questioned that direction because Section 251(1)(a), after the statutory amendment, does not generally confer upon the CIT(A) the power to set aside an assessment and remand it to the Assessing Officer. The Tribunal did not find it necessary to separately rule on that jurisdictional objection because it examined the evidence itself and deleted the addition on merits.

The judgment reinforces that suspicion arising from investigation data may justify enquiry, but suspicion cannot replace examination of the assessee’s evidence.

Cases Discussed

• CIT v. Orissa Corporation Private Limited (1986) 159 ITR 78 — Supreme Court authority relied upon for the principle concerning the Revenue’s duty to pursue enquiry after the assessee furnishes relevant particulars and supporting evidence.

FULL TEXT OF THE JUDGMENT/ORDER OF ITAT, KOLKATA

This Appeal is filed by the Assessee against the order of the NFAC, Delhi (‘Ld. CIT(A)’ for short) dated 16.03.2026, passed u/s 250 of the Income Tax Act, 1961 (“the Act”, for short) for the Assessment Year 2018-19.

2. Brief facts of the case as mentioned in the order of the Ld. CIT(A) are as under:-

“1. The assessee filed its return of income for Assessment Year 2018-19 on 31.10.2018 declaring total income of Rs.1,80,280/-. The assessee is engaged in the business of construction and real estate.

2. Subsequently, information was received by the Ld. Assessing Officer through Insight Portal that assessee-Company had made bogus purchases of Rs.13,44,000/- from M/s. Barbarik Consultancey Private Limited.

Information was also received by the Ld. Assessing Officer through Insight Portal that M/s Saraff Enterprises was found to be indulging in issuing fake invoice to other entities and had evaded GST thereon. The invoices were issued without actual supply of goods and service implying bogus purchases. On going through the list of the entities making alleged bogus purchases from M/s. Saraff Enterprise, it was found that Marignayani Cosmetics Private Limited during the F.Y. 2017-18 corresponding to A.Y. 2018-19 had made purchases to the tune of Rs.25,51,275/- from Saraff Enterprise.

3. Notice u/s 148A(b) of the Act was issued to the assessee to explain the transactions with M/s. Barbarik Consultancy Private Limited and M/s. Saraff Enterprises during the year. Subsequently, order u/s 148A(d) of the Act was passed and notice u/s 148 of the Act was issued to the assessee dated 12.04.2022. In response, the assessee filed the return of income u/s 148 of the Act on 29-04-2022. However, the return of income filed by the assessee was not acknowledged in the assessment order, for reasons best known to the learned AO.

Subsequently, notice u/s 142(1) of the Act was issued to the assessee to explain the transactions with these parties. In response, the assessee filed submission along with the copy of invoices, GST return, bank statement and ledger of the parties in its books. In the submission, the assessee stated that M/s. Barbarik Consultancy Private Limited is a consultant and supplier of labour and man power. M/s. Barbarik Consultancy Private Limited provided labour and other services to the assessee for its construction projects amounting to Rs. 13,44,000/- during the year. The payment was made to them through normal banking channels after deduction of TDS. M/s. Barbarik Consultancy Private Limited had also filed its GST return and the same was reflected in the assessee’s GSTR 2A. It was also submitted that the transactions were duly recorded in the audited accounts of the assessee. This proved the genuineness of the transaction with M/s. Barbarik Consultancy Private Limited.

W.r.t. transactions with M/s. Saraff Enterprises, it was submitted that the assessee had purchased goods from M/s. Saraff Enterprises amounting to Rs.25,51,275/- during the year. However, the goods were returned back to the said party. As such, neither any deduction was claimed on account of the purchase nor any payment was made to this party. It was submitted that the assessee has not claimed any deduction on account of the alleged purchases made from this party as the goods were returned back and therefore no question of any escapement of income arises. As such, no addition could be made w.r.t purchases from this party.

5. However, the Ld. AO was not satisfied with the submission of the assessee and held that the assessee is not able to substantiate the genuineness of the transactions with these parties and added the sums of Rs. 13,44,000/- and Rs. 25,51,275/- to the income of the assessee u/s 69C of the Act.”

3. Aggrieved by the Assessment Order dated 18.03.2024, Assessee preferred an Appeal before the CIT(A). The Ld. CIT(A) vide Order dated 16.03.2026, partly allowed the Appeal of the Assessee. As against the Order of the Ld. CIT(A) dated 16.03.2026, Assessee preferred the present Appeal on following Grounds of Appeal:-

“1). That on the facts and in the circumstances of the case and in law, the order passed by the Ld. CIT(A), NFAC, Delhi u/s 250 of the Act in respect of the appeal filed against assessment order u/s 147 r.w.s. 144B of the Act dated 18/03/2024 is arbitrary, erroneous, opposed to law and contrary to the facts of the case.

2a). That the Ld. CIT(A) erred in law and on facts in confirming the addition of Rs. 13,44,000/- u/s 69C of the Act by treating genuine business expenditure for labour and manpower services paid to M/s Barbarik Consultancy Pvt. Ltd. as unexplained, completely ignoring that the appellant had fully discharged its onus of proof by providing adequate documentary evidence including TDS details, reflection of transaction in the appellant’s bank account, audited books, GSTR-2A entries confirming that the service provider uploaded the corresponding GST invoices and filed their returns.

2b). That the Ld. CIT(A) also erred in confirming the addition of Rs.13,44,000/- u/s 69C of the Act merely because third-party notice u/s 133(6) remained uncomplied with by the vendor and also by completely ignoring that the appellant cannot be penalized for the non-cooperation of a third party when the transaction proof is available on record and hence reliance upon the judgment of CIT vs. Precision Finance P. Ltd. (208 ITR 465) is completely distinguishable on facts and does not apply to transaction backed by statutory tax compliance evidence like GST reflection (GSTR-2A) and TDS.

3a). That the Ld. CIT(A) erred in law by remanding/restoring the issue of Rs.25,51,275/- back to the file of the A.O. for fresh verification, which is in direct violation of sec. 251(1)(a) of the 1961 Act as the Ld. CIT(A) has no power to set aside or remand an assessment back to the A.O. for fresh enquiry, which was passed u/s 147 of the Act.

3b). That without prejudice, the Ld. CIT(A) failed to exercise his co-terminus powers and erred in not deleting the addition of Rs.25,51,275/- on merits despite clear evidence that the purchases made from M/s Saraff Enterprises were returned, no payments were made and hene no expenditure was claimed in the P/L Account and hence the provisions of sec. 69C of the Act are completely inapplicable.

4. That, as the order u/s 250 of the Act of the Ld. CIT(A), NFAC, Delhi dated 16.03.2026 in view of the above grounds suffers from illegality and is devoid of any merit, the same should be quashed and your appellant be given such relief(s) as prayed for.

5. That, the appellant craves leave to amend, alter, modify, substitute, add to, abridge and/or rescind any or all of the above grounds.”

4. Ground No.1 being general in nature, requires no adjudication.

5. The Learned Counsel for the Assessee arguing on Ground No.2(a) and 2(b) of the Grounds of Appeal, contended that the CIT(A) erred in confirming the addition of Rs.13,44,000/- made u/s 69C of the Act by treating genuine business expenditure for labour and manpower services yet to M/s Barbarik Consultancy Private Limited as unexplained, wherein the Ld. CIT(A) completely ignored the fact that the Assessee had fully discharge its onus of proof by providing the documentary evidence including TDS details, reflection of transaction in Assessee’s bank account, audited book, GSTR-2A entries which confirm that service provider uploaded the corresponding GST invoices and filed their returns. The Learned Counsel for the Assessee further contended that the said addition has been made merely because the notice issued to the third-party u/s 133(6) of the Act remained uncompiled with by the vendor. Further contended that for the non-corporation of a third party, when the transaction proof is available on record, Assessee cannot be penalized. Thus, sought for deletion of the addition.

6. Per contra, the Ld. DR contended that the notices issued u/s 133(6) of the Act has not been complied by the vendor, the Assessee has not proved genuineness of the business expenditure, therefore, the addition has been rightly made by the Assessing Officer which has been confirmed by the Ld. CIT(A), thus the same requires no interference at the hands of the Tribunal. Therefore, sought for dismissal of the Ground No.2(a) & 2(b) of the Assessee.

7. We have heard the parties and perused the material available on record. During the assessment proceedings, the Assessing Officer found that M/s Barbarik Consultancy Private Limited had indulged in issuing fake invoices to other entities, evading GST. Further observed that the share capital of M/s Barbarik Consultancy Private Limited was merely Rs. 1 Lakh and they had paid nominal taxes. Considering the financial analysis for A.Y. 2016-17 to 2018-19 of M/s Barbarik Consultancy Private Limited and also considering the fact that the said company was struck off as on the date of the analysis and the Assessing Officer found that Assessee had made purchases from the said entity to the tune of Rs.13,44,000/-.

8. The Ld. Assessing Officer issued notice u/s 133(6) of the Act to M/s Barbarik Consultancy Private Limited, however, no reply was received by the Assessing Officer. Accordingly, the Assessing Officer made the impugned addition. As observed earlier, in order to prove the genuineness of the transactions, Assessee submitted copy of the invoices, GST return, bank statement and ledgers of the parties in its book. It is the specific case of the Assessee that the said M/s Barbaric Consultancy Private Limited has provided labour and other services to the Assessee in its construction projects during the year under consideration and the payment was made through banking channel after deduction of TDS. The source of payment was explained as ‘Revenue from Operations’ of Rs.2,67,71,929/- received by the Assessee which was duly credited in the Profit and Loss account which can be corroborated with Page No.16 of the Paper Book. Further, the said M/s Barbarik Consultancy Private Limited as also filed GST return which is reflected in the Assessee’s GST-2A and the said transactions were duly recorded in the audited accounts of the Assessee. It is observed that the Assessing Officer has not controverted the document produced by the Assessee. However, it is observed by the Assessing Officer that the noticed issued u/s 133(6) of the Act to M/s Barbaric Consultancy Private Limited has not been replied by the said entity. It is an admitted fact that the said company itself has been struck off, therefore, for the very same reason, the notice issued u/s 133(6) of the Act could not have been replied by M/s Barbaric Consultancy Private Limited. Be that as may be, non-compliance of the notice by the third party cannot be a ground to treat the transaction as non-genuine. The Assessing Officer committed error in rejecting the evidences submitted by the Assessee without even making further enquiry. The Hon’ble Apex Court in the case of CIT Vs. Orissa Corporation Private Limited (1986) 159 ITR 0078 held as under:-

“The assessee had given the names and address of the alleged creditors. It was in the knowledge of the Revenue that the said creditors were income-tax assessees. Their index number was in the file of the Revenue. The Revenue, apart from issuing notice u/s 131 at the instance of the assessee, did not pursue the matter further. The Revenue did not examine the source of the income of the said alleged creditors to find out whether they were credit-worthy or were such who could advance the allowed loans. There was no effort made to pursue the so-called alleged creditors. In those circumstances, the assessee could not do any further. In the premise, if the Tribunal came to the conclusion that the assessee has discharged the burden that lay on him then it could not be said that such a conclusion was unreasonable or perverse or based on no evidence. If the conclusion is based on some evidence on which a conclusion could be arrived at, no question of law as such arises. It cannot, therefore, be said that any question of law arose in these cases. The High Court was, therefore, right in refusing to refer the question sought for.”

9. In view of the above discussion, we find merit in the Ground No.2(a) and 2(b) of the Assessee’s Grounds of Appeal. Accordingly, the addition of Rs.13,44,000/- made by the Assessing Officer u/s 69C of the Act which has been confirmed by the Ld. CIT(A) is hereby deleted. Accordingly, the Ground No.2(a) and 2(b) are allowed.

10. In Ground No.3 of the Grounds of Appeal, Assessee contended that the Ld. CIT(A) committed error in remanding/ restoring the issue of the addition of Rs.25,51,275/- made u/s 69C of the Act to the file of the Assessing Officer for fresh verification which is in violation of provisions of Section 251(1)(a) of the Act. The Learned Counsel further submitted that the Ld. CIT(A) has no power to remand the addition to the file of the Assessing Officer, which was passed u/s 147 of the Act. The Learned Counsel also submitted that the Ld. CIT(A) committed error in not deleting the addition of Rs.25,51,275/-despite clear evidence produced to prove that the purchases were made from M/s Saraff Enterprises were returned, no payment was made and no expenditure was claimed in the Profit and Loss account, therefore, invocation of provisions of Section 69C of the Act by the Assessing Officer is erroneous. Thus, sought for allowing the Ground No.3(a) and 3(b) of the Appeal.

11. Per contra, the Ld. DR relying on the orders of the Lower Authorities sought for dismissal of the Ground No.3(a) and 3(b) of the Grounds of Appeal.

12. We have heard the parties and perused the material available on record. Based on the information received by the Assessing Officer that M/s Saraff Enterprises were found to be indulged in issuing fake invoices to other entities and evaded GST thereon and on ITR data analysis of the saidparty, it was found that the said entity M/s Saraff Enterprises has never filed its ITR and contended that the said entity is a bogus shell entity. It is further found by the Assessing Officer that the Assessee company made purchases in the year under consideration to the tune of Rs.25,51,275/-.

13. During the assessment proceedings, the Assessing Officer called the Assessee to explain the genuineness of the said transactions. In reply, Assessee stated that Assessee had purchased goods from M/s Saraff Enterprises amounting to Rs.25,51,275/- during the year under consideration, however, the goods were returned back to the said party in the immediately succeeding year and therefore no payment was required to be made to the said party. It was the case of the Assessee that Assessee has not claimed any deduction on account of the said purchases made from the said party as goods were returned back in the succeeding year. To substantiate the said contention, Assessee also produced the ledger of the party at Page No.4 & 5 of the Paper Book. Further, the Assessee claimed that purchases made from the said party remained unsold during the year and therefore the same were obviously forms part of the closing stock for the year of the current year which was duly credited to the Profit and Loss Account. In other words, Purchases account was debited in the Profit and Loss Account and Stock Account was credited, thus the net effect of those entries was tax neutral. The Assessee has also produced Profit and Loss account of the company at Page No.16 and 26 and on perusal of the Note 18, it is found that Cost of product sold was Rs.1,64,02,272/-. The breakup of the same is tabulated below:-

14. From the above, it is found that the net effect of purchases made from M/s Saraff Enterprises had a NIL effect on the income of the Assessee as there was a corresponding debit and credit entry. Further, the GST claimed by the Assessee in the current year on account of purchases made from the said party was also reversed in the succeeding year, F.Y. 2018-19. The copy of the ledger of purchase return, debit note raised on the Assessee and GST Return for the F.Y. 2018-19 is reproduced as under:-

4. Eligible ITC

15. Thus, it is seen that no GST input was actually claimed by the Assessee with respect to purchases made from Saraff Enterprises. Further, the purchases returned to the said party were also accepted by the Department in so far as Assessment year 2019-20 is concerned. Thus, it is found that, no payment was made to M/s Saraff Enterprises during the year, the goods purchased from the said entity was duly returned in F.Y. 2018-19 and no expenditure was claimed by the Assessee during the year with respect to purchases made from the M/s Saraff Enterprises. The said purchases/ expenditure was neutralized by a corresponding credit entry made in the closing stock as the purchases made from the said party remained unsold during the year. In view of the above, we find no reason to sustain the addition made by the Assessing Officer. Accordingly, the addition of Rs.25,51,275/- made u/s 69C of the Act is hereby deleted. Thus, the Assessee’s Grounds No.3(a) and 3(b) are allowed.

16. The Ground No.4 & 5 are being general in nature, which require no adjudication.

17. In the result, Appeal of the Assessee is allowed.

Order pronounced on 11.09.2026.