Bombay High Court rules that purchase genuineness, not suspicion, determines unexplained expenditure status

The Bombay High Court has upheld the deletion of a ₹104.99 crore addition under Section 69C, emphasising that a disputed purchase alone does not constitute unexplained expenditure without proof of source.

The Bombay High Court has upheld the deletion of a ₹104.99 crore addition made under Section 69C, ruling that a disputed purchase cannot be treated as unexplained expenditure merely because tax officials doubt its genuineness. The case, decided on 31 July 2026 for assessment year 2017-18, centred on purchases routed through letters of credit, with the Revenue alleging that the arrangement was used to divert bank funds.

According to the court’s reasoning, Section 69C applies only where the source of expenditure is not explained, or where the explanation is unsatisfactory. That distinction proved decisive. The assessee had produced stock statements, MVAT records, sales details, confirmations and recovery-related material, while also pointing to the banking trail behind the letters of credit. The High Court agreed with the Income Tax Appellate Tribunal that an adverse view on the purchase transaction did not, by itself, satisfy the statutory test for treating the outlay as unexplained expenditure.

The ruling also underlines a recurring point in tax litigation: the genuineness of a purchase and the source of its funding are separate questions. A transaction may attract scrutiny if suppliers are suspicious or documentation appears weak, but that does not automatically mean the expenditure came from an undisclosed source. Legal commentators have noted that the High Court effectively required the Revenue to show independent evidence linking the alleged bogus purchase to an unexplained source of funds, rather than relying on inference alone.

That approach is consistent with other direct tax decisions that stress the need for proper evidence before disallowing large sums. In a separate 2026 tribunal ruling, where corresponding sales were not in dispute, authorities were said to be better placed making a limited profit-related adjustment rather than adding the full alleged purchase value as unexplained expenditure. Earlier Bombay High Court case law has also emphasised the importance of basic financial records, including bank statements, when assessing whether purchases are proved.

For businesses, the judgment is a reminder to keep a full documentary trail: banking instructions, stock records, tax returns, supplier confirmations, transport papers and proof of sales. For the Revenue, it reinforces a narrower message: suspicion about a transaction is not enough on its own. If Section 69C is invoked, the department must show that the source of expenditure is in fact unexplained. In this case, the court found that threshold had not been met, and the Revenue’s appeal failed.