The Kolkata Tribunal’s decision in Ganesh Steel & Alloys Ltd. v. Dy. CIT [2024 TaxPub(DT) 3088] (AY 2012–13) is a timely reminder for both taxpayers and the Department:
Section 69C cannot be invoked mechanically merely because a supplier becomes untraceable years later.
The ruling reinforces the enduring judicial principle that commercial documentation and utilization records prevail over suspicion or non-verifiability, ensuring that genuine business expenditure is not penalized without concrete proof.
Background of the Case
Ganesh Steel & Alloys Ltd., a manufacturing concern, had declared purchases of ₹47.03 lakh from Chakradhari Industries. The Assessing Officer (AO) treated these purchases as bogus and added the entire amount under Section 69C, citing:
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Non-response by the supplier to notices under Section 133(6)
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An inspector’s report declaring the supplier “untraceable”
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Lack of verification, nearly seven years after the transaction
The AO thus deemed the expenditure “unexplained” and disallowed it in full.
Understanding Section 69C — The Real Test
Section 69C empowers the AO to treat an expenditure as deemed income when:
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The assessee incurs expenditure; and
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Offers no explanation about its source; or
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The explanation offered is found unsatisfactory.
However, the provision applies only when the source of expenditure is unexplained, not when the genuineness or identity of the supplier is merely in doubt. Courts have consistently held that the AO must first prove that such expenditure was actually incurred and then question its source — not the other way around.
Assessee’s Defense: Unbroken Documentary Chain
Ganesh Steel produced comprehensive documentation demonstrating the genuineness of purchases and their direct utilization in production:
1. Manufacturing and Excise Records
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Stock registers evidencing inward receipt and issue of materials
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RG-23A and RG-23C excise records (for principal inputs and capital goods)
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Production records correlating with raw material consumption
2. Commercial and Financial Documentation
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Audited books of account
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Purchase invoices, delivery challans, and payment proofs through banking channels
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Sales records showing conversion of raw material into finished goods
The logical chain from purchase → production → sale remained unbroken and accepted by the AO — undermining any claim that purchases were fictitious.
Tribunal’s Observations — AO’s Failure to Discharge Burden
The Kolkata ITAT decisively ruled in favour of the assessee, laying down key findings:
1. Documentary Evidence Not Disproved
The AO failed to identify any defect in books, stock, or excise records. Once the assessee furnishes documentary evidence, the burden shifts to the Revenue to bring contrary material — a principle reaffirmed in CIT v. Daulat Ram Rawatmull (87 ITR 349, SC).
2. Sales Accepted, Purchases Doubted — A Contradiction
The Tribunal noted that if sales were accepted, it was illogical to deny corresponding purchases. No production is possible without input materials — a basic business reality ignored by the AO.
3. Reliance Solely on Third-Party Information
The AO merely relied on:
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Sales tax department reports,
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Non-response under Section 133(6), and
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The inspector’s non-traceability remark.
However, no independent inquiry or verification was undertaken — contrary to the mandate of law.
4. Denial of Cross-Examination
The assessee was denied the right to cross-examine any third party relied upon by the AO. The Tribunal cited S.L. Kapoor v. Jagmohan [(1980) 4 SCC 379]* — holding that breach of natural justice is in itself prejudicial; proving separate prejudice is unnecessary.
5. Time Lapse Cannot Create Bogusness
The supplier’s non-traceability after seven years could not retrospectively render past transactions non-genuine. Businesses often relocate, restructure, or cease operations — a commercial fact recognized by the Tribunal.
Key Legal Principles Reinforced
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Primary Onus and Shifting Burden
Once documentary proof is furnished, the onus shifts to the Revenue to rebut it with cogent evidence — not mere suspicion or third-party information. -
Assessee Cannot Prove a Negative
As held in Ankit Gems (P.) Ltd. v. ITO (ITA No. 3253/Mum/2013), an assessee cannot be compelled to prove a negative — i.e., to prove the non-occurrence of a bogus event. -
Section 69C vs. Section 37(1)
Where the genuineness of expenditure is questioned but its source is known, Section 37(1) applies, not Section 69C. The latter covers only cases where the source of expenditure is unexplained. -
Profit Element Theory
Even in cases involving accommodation entries or hawala purchases, courts have consistently restricted additions to the embedded profit element (5–25%) when sales are accepted — see CIT v. Simit P. Sheth (356 ITR 451, Guj.).
Practical Guidance for Taxpayers
To safeguard against Section 69C or bogus purchase allegations, taxpayers should maintain a defensible evidentiary trail:
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Full Purchase Documentation: invoices, orders, transport receipts, e-way bills, bank transfers
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Inventory Controls: quantitative reconciliation of purchases, consumption, and production
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Excise/GST Records: RG registers (for excise), GSTR-1/2A/3B alignment (for GST era)
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Financial Audit Evidence: audited accounts, ledger extracts, bank confirmations
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Natural Justice Protections: always seek cross-examination and rebuttal opportunity against any third-party evidence
Critical Perspective — The Future Doctrine
The Ganesh Steel ruling strengthens the evolving “Doctrine of Evidentiary Continuity” in tax jurisprudence — that once a transaction is supported by contemporaneous records and business utilization, later non-verifiability cannot override primary evidence.
For future assessments, this case sets three strong benchmarks:
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Suspicion ≠ Proof — No addition can stand on the foundation of non-response or non-traceability alone.
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Evidence ≠ Elastic — The genuineness of transactions must be judged from contemporaneous records, not years later.
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Natural Justice = Non-Negotiable — Cross-examination and independent inquiry are prerequisites before invoking Section 69C.
Conclusion — Fair Taxation Needs Fair Inquiry
The Kolkata ITAT’s ruling in Ganesh Steel & Alloys Ltd. is not just a relief for one assessee — it is a doctrinal reaffirmation of fairness in tax administration.
Section 69C is a precision instrument, not a blunt weapon.
