Unexplained expenditure under Section 69C deleted where purchases are recorded and source is substantiated by documentary and customs verification.

Unexplained expenditure rules treat the source of expenditure as decisive; where purchases are recorded in regular audited books and the assessee substantiates the source with invoices, bank statements and independently authenticated export documentation, Section 69C cannot be invoked to treat those purchases as unexplained. Non-response by creditors to enquiries under statutory notice provisions, without rejection of books or material showing falsity, does not justify an adverse inference converting recorded purchases into unexplained expenditure. Applying these principles, the addition treating recorded purchases as unexplained is unsustainable and is deleted, resulting in a decision for the assessee.

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Issues: Whether the addition of Rs. 2,97,66,224/- made by the Assessing Officer under Section 69C of the Income-tax Act, 1961 treating purchases as unexplained expenditure is sustainable.

Analysis: Section 69C applies where an assessee has incurred an expenditure and offers no explanation about the source of such expenditure; the statutory focus is on the source of expenditure and not on the authenticity of the expenditure recorded in books. In the present case the purchases were recorded in the assessee's audited books of account and supporting material (invoices, bank statements, shipping bills) was produced and independently authenticated by Customs authorities for SEZ exports. Coordinate and High Court precedents establish that where expenditure is recorded in regular books and the source is explained, Section 69C is not attracted. Non-response of creditors to notices issued under Section 133(6) does not, by itself, permit adverse inference to treat recorded purchases as unexplained expenditure when books are not rejected and no material demonstrates falsehood of books. The Assessing Officer did not point to rejection of books or specific discrepancies undermining the source of purchases; appellate findings relying on documentary and Customs verification were not misplaced.

Conclusion: The addition of Rs. 2,97,66,224/- under Section 69C is unsustainable and is deleted; the Revenue appeal is dismissed and the assessee's cross-objection is allowed (decision in favour of the assessee).

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