Vendor Non-Compliance to Statutory Notices Cannot Trigger Section 69C Additions When Supported by Documentary Evidence: ITAT Mumbai

The intersection of third-party compliance and an assessee's tax liability frequently generates substantial litigation under the Income-tax Act 1961. A recurring dispute arises when vendors or suppliers fail to respond to statutory notices issued by the tax department, prompting assessing authorities to doubt the genuineness of the underlying transactions. In a highly significant ruling, the Income Tax Appellate Tribunal (ITAT), Mumbai, in the case of DCIT Vs Grab A Grub Services Limited, has reinforced the legal principle that an assessee cannot be penalized for the non-responsiveness of its vendors, provided the assessee has discharged its primary evidentiary burden.

This comprehensive analysis explores the tribunal's findings, the statutory framework surrounding unexplained expenditures, and the judicial precedents that protect an assessee who maintains robust documentation and transacts through proper banking channels.

Factual Matrix of the Dispute

The assessee, Grab A Grub Services Limited, operates as a public limited company providing logistics and delivery services. For the Assessment Year (AY) 2023-24, the assessee filed its return of income on 31.10.2023, declaring a loss amounting to ₹5,62,27,163. The return was initially processed under Section 143(1) of the Income-tax Act 1961 and was subsequently picked up for detailed scrutiny assessment.

During the assessment proceedings, the Assessing Officer (AO) utilized the tax department's Insight portal to analyze GST data. The AO observed that the assessee had claimed purchases and expenditures totaling approximately ₹14.54 crores from 49 specific parties. According to the departmental database, these 49 entities were flagged as non-filers of their respective income tax returns for periods prior to AY 2022-23.

The Assessment Proceedings and Statutory Inquiries

To probe these transactions, the AO issued a notice under Section 142(1) on 05.03.2025. The tax department directed the assessee to produce comprehensive documentation proving the authenticity of the expenditures. The requested details included:

  • Permanent Account Numbers (PAN) and Goods and Services Tax Identification Numbers (GSTIN) of the vendors.
  • Purchase invoices and matching GST returns (GSTR-2A/2B).
  • Proof of payments and contact information for the suppliers.
  • Confirmations regarding the tax filing status of these vendors for years preceding AY 2022-23.
  • Business justification for engaging with non-filers and the due diligence framework utilized before onboarding them.

The assessee submitted a voluminous reply on 13.03.2025. The submission contained the addresses, PAN, and GSTIN details of the vendors. Crucially, the assessee provided log files downloaded from the Income Tax Reporting Portal for AY 2023-24, demonstrating the compliance status of these parties under the "specified persons" category. Furthermore, the assessee supplied sample invoices, party ledgers (excluding two minor parties with a combined transaction value of ₹27,920), sample agreements (excluding 21 parties with a transaction value of ₹1,38,99,140), and bank statement extracts confirming that all financial settlements occurred strictly via formal banking channels.

The Section 133(6) Notices and Resulting Addition

Seeking independent verification, the AO dispatched notices under Section 133(6) directly to the 49 vendors. The response rate was minimal. Only 5 parties, representing transactions worth ₹36,29,079, replied to the statutory notices. The remaining 44 entities completely ignored the departmental communication.