ITAT Bangalore Nixes Section 69C Addition Based Only on Supplier SAP Data & PAN Mapping

Background of the Dispute

The appeal in Prakash Palgota Vs DCIT (ITAT Bangalore) revolves around whether an assessee’s alleged “unaccounted purchases” can be established solely on the basis of SAP data and internal records of a third-party supplier, where the only clear linkage is the assessee’s PAN tagged to a disguised customer name.

The assessee, Shri Prakash Palgota, is an individual carrying on business as a sole proprietor under the name Icon Fashion in Hubli, engaged in wholesale trading of ready-made garments. For AY 2022–23, he filed his return of income on 08 October 2022 declaring total income of ₹26,19,740.

Subsequently, a search under the Income Tax Act was conducted on 28 May 2022 in the case of one of his suppliers, J. M. Jain LLP (earlier a proprietorship). During this search, the Department unearthed SAP-based transaction data which allegedly showed both recorded (cheque) sales and unrecorded (cash) sales made by the supplier to various customers.

On the strength of this seized material and statements of the supplier’s personnel, the Assessing Officer (AO) concluded that purchases aggregating to ₹89,00,638 represented unaccounted purchases made by the assessee from J. M. Jain LLP, warranting addition under Section 69C. Another disallowance of ₹1,43,066 was made under Section 40(a)(ia) on account of alleged non-deduction of tax under Section 194A on interest of ₹4,76,888.

The assessee’s appeal before the CIT(A), NFAC failed, leading to the present appeal before the Bangalore Bench of the ITAT.

Key Issues Before the Tribunal

The appeal broadly raised two substantive issues (besides certain general grounds):

  1. Whether the AO was justified in adding ₹89,00,638 under Section 69C as unexplained expenditure on purchases, based solely on:

    • SAP data and internal ledgers of J. M. Jain LLP,
    • entries under the disguised name “Kalyan Creations, Hubli” tagged with the assessee’s PAN, and
    • statements of persons connected with the supplier,
      without:
    • any direct evidence of delivery, despatch or receipt of goods,
    • proof of payment flows, or
    • opportunity to cross-examine the supplier’s partners/directors.

  2. Whether disallowance of ₹1,43,066 under Section 40(a)(ia) for alleged violation of Section 194A was valid, when the assessee claimed to have obtained valid Form 15G/15H from all interest recipients, thereby obviating the requirement to deduct TDS.

Facts Relating to the ₹89 Lakh Addition Under Section 69C

SAP Data and the “Kalyan Creations, Hubli” Entries

During the search on J. M. Jain LLP, the Department found that the supplier was using a SAP server to record detailed customer transactions with bifurcation into:

  • Cheque component – reflected in regular books of both supplier and customer;
  • Cash component – alleged to be unaccounted and kept outside the formal books of J. M. Jain LLP.

It was further claimed that the supplier adopted a practice of masking or camouflaging real customer identities in these SAP records for cash transactions. In the assessee’s case:

  • The SAP records reflected entries in the name of “Kalyan Creations, Hubli”.
  • Against this masked name, the Permanent Account Number (PAN) recorded was that of the assessee, Icon Fashion’s proprietor.
  • On this basis, the Department concluded that sales shown against “Kalyan Creations, Hubli” were in fact unrecorded sales made to Icon Fashion.
  • The total of such alleged sales was quantified at ₹89,00,638 for the relevant period.

AO’s Reasoning and Addition Under Section 69C

Proceeding on these findings, the AO issued a show cause notice to the assessee, enclosing extracts of the SAP data and statements of the relevant persons from J. M. Jain LLP, wherein it was admitted that the supplier indulged in under-billing and out-of-books cash sales.

The AO concluded that:

  • The entries corresponding to “Kalyan Creations, Hubli” effectively related to Icon Fashion because the PAN was the assessee’s.
  • Since these sales were not recorded in the regular books of the supplier, they represented unaccounted sales.
  • Correspondingly, in the assessee’s hands, these were treated as unrecorded / unexplained purchases.
  • Hence, the sum of ₹89,00,638 was brought to tax as unexplained expenditure under Section 69C.

The AO’s view was subsequently affirmed by the CIT(A), who held that the AO’s conclusions were supported by: