2024 (7) TMI 1693 - AT - Income Tax

Additions under Section 69C for unexplained expenditure unsustainable where audited financial statements adequately explain the sources

Alexis Global Private Limited Versus Asst. CIT, Circle-2 (2), Delhi

ITAT held that additions under s.69C for unexplained expenditure were unsustainable where the assessee had furnished audited financial statements ... Unexplained expenditure u/s 69C - genuineness of the transaction - HELD THAT:- We are inclined to delete the additions proposed by the AO u/s 69C of the Act wherein the sources for the expenditure is already explained by the assessee by submitting the audited financial statements, therefore, the provisions of the section 69C are not applicable to the present case. Accordingly, the additions made by the AO are deleted. Appeal filed by the assessee is allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether additions under the deeming provision for unexplained expenditure (Section 69C) are sustainable where the expenditure is recorded in regular books of account, supported by audited financial statements and paid through banking channels (i.e., whether 'source' is explained despite disputed genuineness of transactions). 2. Whether the Assessing Officer (AO) can disallow/ deem as unexplained the entire contract/contractor payments merely because many payees allegedly have not filed returns, without conducting independent verification of deductees (including issuing notices/summons under Section 133(6)). 3. Whether an assessee's failure to furnish full particulars during assessment proceedings (and seeking adjournment) precludes consideration of that evidence at the first appellate stage under Rule 46A, and whether the appellate authority erred in restricting allowance to amounts shown on a portion of the particulars. 4. Whether the Tribunal/first appellate authority may re-cast an addition made under one deeming provision into another provision or otherwise travel beyond the scope of the ground of appeal (i.e., limits on changing charging section). 5. Ancillary: whether the AO adduced any material to show payments were made to bogus parties and whether such non-production / non-verification constitutes lack of application of mind by AO. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Applicability of Section 69C where expenditure is recorded and paid through banking channels (Legal framework) Legal framework: Section 69C deems expenditure to be income where an assessee has incurred expenditure and offers no explanation about the source of such expenditure or the explanation is unsatisfactory. The statutory focus is on 'source' of expenditure rather than on the intrinsic authenticity of each expenditure item. Precedent treatment: The Court/Tribunal relied on decisions holding that where expenditures are reflected in regular books and sourced from funds recorded in the books (and/or paid through banking channels), Section 69C is inapplicable; deeming provisions must be strictly construed. Prior authorities treated Section 69C as confined to unexplained source and have disallowed invoking it when books were not discarded and no material showed off-books payments. Interpretation and reasoning: The Tribunal examined whether AO identified any unexplained source or off-books payment. Finding that audited books, TDS records and banking evidence showed that payments were recorded and sourced from funds in the books, the Tribunal concluded that the threshold requirement for invoking Section 69C (i.e., unexplained source) was absent. The Tribunal emphasized that questioning genuineness of transactions (vouchers, subsistence of contracts) is distinct from showing absence of source; Section 69C targets the latter. Deeming provisions require strict construction and the AO must bring material to establish unexplained source before invoking the fiction. Ratio vs. Obiter: Ratio - Section 69C not attracted where source is satisfactorily explained by books, bank payments and audited statements; deeming fiction to be strictly construed. Obiter - observations on commercial practice in logistics/warehousing (need for subcontracting) and examples of credible service providers are contextual but not essential to the legal ratio. Conclusions: Addition under Section 69C cannot be sustained where expenditures are recorded in books, paid through banking channels and supported by audited financial statements; therefore the additions were deleted on this ground. Issue 2 - AO's duty to verify deductees and use of Section 133(6) Legal framework: AO has power to make enquiries and call for information from third parties (e.g., Section 133(6)) to verify genuineness of transactions. Selection criteria referencing large payments to non-filers may prompt further enquiries but do not by themselves justify blanket disallowance. Precedent treatment: Authorities point out that AO must carry out independent enquiries to doubt transactions; mere classification of payees as 'non-filers' is insufficient to treat payments as bogus without verifying which specific deductees are non-filers and obtaining corroborative evidence. Interpretation and reasoning: The Tribunal found AO did not classify deductees between filers and non-filers nor issue summons/notice to verify transactions. The AO had not questioned the particulars that were on record (PANs, names, amounts) nor pursued enquiries available through statutory powers. Consequently, AO's wholesale disallowance lacked factual foundation. Where the assessee furnishes detailed deductee information and TDS deposition records, AO's failure to verify but instead to assume non-genuineness is impermissible. Ratio vs. Obiter: Ratio - AO must verify disputes as to genuineness by available statutory processes (e.g., Section 133(6)) before treating recorded payments as unexplained; absence of such verification undermines addition. Obiter - procedural remarks on what enquiries AO could have made are illustrative. Conclusions: Without independent verification of deductees, including classification of which payees had not filed returns and follow-up enquiries, the AO could not sustain blanket disallowance under Section 69C. Issue 3 - Admissibility and treatment of evidence at appellate stage (Rule 46A and evidentiary opportunity) Legal framework: Rule 46A permits production of additional evidence before appellate authority if specific conditions are satisfied (e.g., AO refused to admit evidence, appellant prevented by sufficient cause, or AO made order without giving sufficient opportunity). Precedent treatment: Authorities indicate appellate stage can admit fresh or previously sought documents if those conditions are met; but burden remains on appellant to satisfy criteria and appellate authority to record findings when admitting such evidence. Interpretation and reasoning: The Tribunal examined whether the assessee had tendered the complete annexures during assessment and whether the AO refused admission or assessment was completed without giving opportunity. While the assessee contended all details were filed and an adjournment was sought, the Tribunal recorded that the AO did not make findings on the provided annexures and that the appellate authority had partly accepted only the first page of annexures. The Tribunal nonetheless found that the totality of deductee details (three pages) had been furnished and, combined with audited books, sufficed to explain source. The appellate authority's restriction to a subset of the submitted details was treated as insufficient to sustain the larger disallowance. Ratio vs. Obiter: Ratio - where complete deductee details and documentary evidence have been placed before tax authorities and there is no meaningful finding by AO rejecting them or no valid reason to withhold, appellate restriction to a portion of the evidence cannot sustain addition under Section 69C. Obiter - specific assessment of whether Rule 46A conditions were formally satisfied was fact-specific. Conclusions: The assessee's furnished particulars (three-page TDS/deductee list) were adequate to show source; appellate truncation of those particulars without justification did not validate AO's additions and did not preclude relief. Issue 4 - Limitations on tribunal/appellate authority to reframe charge under different deeming provisions Legal framework: The tribunal's power is confined to matters arising in appeal; it cannot travel beyond the scope of the grounds to tax under a different provision or re-cast the addition under another deeming fiction without jurisdiction to do so. Precedent treatment: Cited authority holds the tribunal cannot substitute one charging provision for another when the matter before it relates to a specific section; doing so vitiates the order. Interpretation and reasoning: While not central to the final disposal here, the Tribunal reiterated that an assessing or appellate authority must not change the legal basis of charge beyond the subject matter of appeal; if AO relies on Section 69C, parties should be given opportunity to meet that case and the tribunal cannot convert it to another section. Ratio vs. Obiter: Ratio - appellate/tribunal powers are limited to the matters in dispute; changing the charging section without proper opportunity is impermissible. Obiter - specific application to the present record was not necessary to the final outcome but stated as a governing principle. Conclusions: Tribunal upheld the principle that additions under one deeming section cannot be re-framed under another without jurisdiction/opportunity; this constrained possible revenue permutations and supported deletion when Section 69C was not attracted. Issue 5 - Whether AO produced material showing payments to bogus parties / application of mind Legal framework: AO bears onus to produce material or reasoned finding to counter the assessee's records and demonstrate transactions are not genuine; mere suspicion or selection criteria do not substitute for material evidence. Precedent treatment: Decisions emphasize that where books are not discarded and no material shows transactions are off-books or fictitious, additions cannot be justified by mere allegation of bogus payees. Interpretation and reasoning: The Tribunal found AO had not brought evidence that particular payees were bogus nor identified which payees had not filed returns; AO did not perform the classification or follow-up verifications. In absence of such material or reasoned findings, AO's conclusion of non-genuineness lacked application of mind. Ratio vs. Obiter: Ratio - AO must produce material and exercise mind in identifying and proving bogusness; absent such material, disallowance fails. Obiter - remarks on what AO ought to have done are illustrative. Conclusions: AO failed to demonstrate payments were to bogus parties or that books were unreliable; hence additions were unsustainable. Final Disposition (consequential legal conclusion) The Tribunal concluded that Section 69C was inapplicable on the record because the source of the expenditures was explained by books, audited statements and banking records, and because the AO failed to carry out independent verification of deductees or bring material showing off-books/ bogus payments; accordingly the additions were deleted and the appeal allowed.