Kolkata ITAT on Section 69C & Section 40A(3): Survey Records of Sales Receipts Cannot Be Taxed as Unexplained Expenditure

The Kolkata Bench of the Income Tax Appellate Tribunal, in the case of Amit Kedia Vs ACIT (ITAT Kolkata), has delivered an important ruling on the correct application of Section 69C (unexplained expenditure) and Section 40A(3) (disallowance of cash payments) of the Income Tax Act 1961. The decision arises out of multiple appeals involving a wholesale hardware trader carrying on business under the proprietary concern M/s Kedia Enterprises.

The Tribunal examined whether loose sheets found during a Section 133A survey, which reflected amounts received from debtors, could be treated as unexplained expenditure under Section 69C, and whether certain cash payments towards salary, audit fees and sales promotion could be disallowed under Section 40A(3) despite the assessee pleading commercial expediency.

Background of the Case

Assessee’s Business and Survey Action

• The assessee, Shri Amit Kedia, is a proprietor of M/s Kedia Enterprises, engaged in wholesale trading of hardware and related sundry items.
• A survey under Section 133A(1) was carried out on 26.02.2018 at the assessee’s business and residential premises.
• During the survey, officials impounded various loose sheets and documents labelled (inter alia) as KE-2, KE-4, KE-10, KE-13, KE-14, KE-16 and KE-17.
• These loose sheets contained details of:
  • Amounts receivable from debtors,
  • Collections from customers (including cheques),
  • Inventory related notes.

No statement/deposition of the assessee was recorded during the survey.

Return Filing and Reassessment

• For A.Y. 2016-17, the assessee originally filed a return of income on 05.10.2016 declaring total income of Rs. 29,61,590/-.
• Based on the material gathered in survey, the Assessing Officer (“AO”) formed a view that:
  • Cash payments exceeding the monetary threshold under Section 40A(3) had been made, and
  • Certain transactions allegedly remained unrecorded in the regular books of account.
• Notice under Section 148 was issued, thereby reopening the assessment.
• In response, the assessee filed a return on 24.04.2021, reiterating the same income as in the original return.
• Statutory notices and questionnaires were served; the assessee also lodged objections to the reopening, which were disposed of by the AO.

Controversy Under Section 69C – Characterisation of Survey Entries

AO’s View: Loose Sheets Show Unexplained Cash Expenditure

The AO consolidated details from the impounded documents and concluded that:

• There were aggregate cash payments of Rs. 17,76,307/-.
• The assessee failed to satisfactorily explain these alleged cash payments.
• A show cause notice was issued proposing addition of these amounts as unexplained expenditure.

The assessee denied having made such cash payments as alleged and challenged the characterization of the entries.

Despite this, the AO:

• Treated the entries as unexplained expenditure,
• Concluded that the assessee had not discharged the onus of proving the nature and source of the payments, and
• Added Rs. 17,76,307/- to the income under Section 69C as unexplained cash expenditure.

Assessee’s Stand: Entries Represented Receipts from Debtors

During assessment and, more elaborately, at the appellate stage, the assessee argued that: