Unexplained purchase additions fail when genuine purchases are backed by documents, banking payments and business records.

An addition under section 69C for unexplained purchase expenditure is not sustainable where the purchases are accepted as genuine and are supported by bills, vouchers, import documents and banking-channel payments. Cash sales and subsequent bank deposits do not, by themselves, make the purchase source unexplained when substantial opening stock and business imports also support the transaction trail. At most, the identity of retail purchasers may remain in issue, but that does not justify a section 69C addition on these facts. The assessee therefore succeeded.

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Issues: Whether the addition made under section 69C of the Income-tax Act, 1961 on the premise that the source of purchase was unexplained, despite acceptance of the purchases as genuine and their being supported by documents and banking channels, was sustainable.

Analysis: The assessment authority had accepted that the purchases were genuine, and the appellate authorities found that the purchases were supported by bills, vouchers, import documents and payments through banking channels. On those findings, the mere fact that the assessee sold goods in cash and deposited sale proceeds in the bank did not render the purchases or their source unexplained. The existence of substantial opening stock and the import of diamonds for business purposes further negatived the premise that the expenditure on purchases was unproved. The authority could at best question the identity of retail purchasers, but that by itself did not justify an addition under section 69C.

Conclusion: The addition under section 69C was not sustainable and the assessee succeeded.

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