ITAT Pune: Addition under Section 69C to be Limited to Profit Element for Small Retail Business

Background of the Dispute

The Pune Bench (SMC) of the Income Tax Appellate Tribunal, in the case of Sachin Ganpat Vadane Vs ITO, examined whether the entire cash purchases recorded as unexplained expenditure could be brought to tax under Section 69C of the Income Tax Act 1961, where the assessee was a small village-level retail trader and the sales were not disputed.

The matter related to A.Y. 2019-20 and arose from a reassessment framed under Section 147 r.w.s. Section 144 r.w.s. Section 144B, followed by an appellate order passed by the National Faceless Appeal Centre, Delhi (CIT(A)), which had confirmed the addition.

The Tribunal ultimately held that where the business activity is established and the assessee is engaged in low-margin retail trading, it is only the profit embedded in such purchases that can be taxed, not the Gross Purchases figure, and estimated income under Section 44AD accordingly.

Facts of the Case

Nature of Business and Cash Purchases

  • The assessee was an individual based in a village in South Solapur, District Solapur.
  • He claimed to be primarily an agriculturist and also a small retail trader dealing in cattle feed.
  • During the relevant financial year, he had made cash purchases aggregating to ₹12,06,959 from Hindustan Eco Tech Private Limited.
  • The purchases were stated to be for resale in the course of his retail trade, with small margins, to cattle owners in and around the village.

Reassessment and Best Judgment Assessment

  1. Based on information regarding cash purchases from Hindustan Eco Tech Private Limited, the Assessing Officer issued a notice under Section 148.
  2. The assessee did not participate effectively in the assessment proceedings.
  3. In the absence of cooperation, the Assessing Officer proceeded to frame a best judgment assessment under Section 144.
  4. The entire amount of cash purchases of ₹12,06,959 was treated as unexplained expenditure under Section 69C and added to the assessee’s income.
  5. The total assessed income was thus fixed at ₹12,06,959.

Proceedings Before CIT(A)

Before the CIT(A), the assessee filed detailed submissions explaining:

  • He was carrying on a small retail business in cattle feed since October 2017.
  • Cattle feed was purchased and then sold in small quantities in the local village market.
  • The purchases were stated to be used for agricultural-related purposes and sold mainly to villagers owning cows and buffaloes.
  • He also argued that his case fell under an exception specified in Rule 6DD of the Income Tax Rules 1962, and therefore Section 40A(3) should not be invoked in relation to cash payments.

The assessee further supported his stand by filing an affidavit dated 06.02.2023, which contained the following assertions:

  • The village in which he carried on business had a population of not more than 6,000.
  • He ran a small retail outlet of cattle feed from October 2017 till March 2020.
  • Daily sales were in the range of approximately ₹4,000 to ₹6,000.
  • His annual business income was around ₹1.50 lakh.
  • He was unable to obtain any confirmation or documents from Hindustan Eco Tech Private Limited, as that entity had been closed.

Despite these submissions, the CIT(A) upheld the Assessing Officer’s action and confirmed the entire addition under Section 69C.

Grounds Raised Before ITAT

In the appeal before the ITAT, the assessee initially challenged: