NAYANKUMAR AMBUBHAI PATEL vs INCOME TAX OFFICER

Introduction

The Income Tax Appellate Tribunal (ITAT), Surat “SMC” Bench, in the case of Nayankumar Ambubhai Patel vs. ITO (ITA No. 1216/Srt/2025, Assessment Year 2020-21), delivered a nuanced ruling on the application of Section 69C of the Income Tax Act, 1961, concerning unexplained expenditure arising from search proceedings. This case commentary critically examines the Tribunal’s decision to partly allow the assessee’s appeal, reducing the addition from the full amount of alleged unexplained expenditure to a 5% profit rate on undisclosed turnover. The analysis focuses on the legal principles governing reopening under Section 147, the evidentiary value of third-party search material, and the scope of Section 69C read with Section 115BBE. The Tribunal’s order, pronounced on 22-04-2026, underscores the importance of trade practices and the assessee’s inability to maintain books of accounts in determining the taxability of undisclosed transactions.

Facts of the Case

The assessee, Nayankumar Ambubhai Patel, an individual engaged in the business of cracker sales, filed his return of income for Assessment Year 2020-21 on 29-12-2020, declaring income of Rs. 1,78,700/-. Subsequently, a search and survey action was conducted on the Ambika Fireworks Group on 16-11-2023. During this search, incriminating material (inventories 1 to 37) was seized, revealing that the assessee had made unaccounted cash purchases from M/s. Ambika Ashish Tradelink LLP amounting to Rs. 10,71,600/- during the relevant year. Based on this information, the Assessing Officer (AO) issued a notice under Section 148 of the Act on 30-03-2024, reopening the assessment. In response, the assessee filed a revised return on 17-06-2024, declaring income of Rs. 2,30,250/-.

The AO observed that statements recorded during the search, particularly of Tejas Vikrambhai Modi, indicated that discounts shown in bills were not actual discounts but represented cash collected from customers. The AO held that the assessee failed to explain the source of the cash purchases and made an addition of Rs. 10,71,600/- under Section 69C read with Section 115BBE as unexplained expenditure. The CIT(A) (National Faceless Appeal Centre, Delhi) confirmed this addition on 04-11-2025. Aggrieved, the assessee appealed to the ITAT, raising grounds including the invalidity of reopening under Section 147, lack of corroborative evidence, violation of natural justice (no cross-examination), and the arbitrary nature of the addition.

Reasoning of the Tribunal

The Tribunal, comprising Vice President Dr. BRR Kumar and Judicial Member Suchitra Kamble, heard both parties and perused the material on record. The core issue was whether the addition of Rs. 10,71,600/- under Section 69C was sustainable given the assessee’s defense that he was not provided with the hand-written Rozmels (day books) seized during the search and that he relied solely on computerized ledger accounts from M/s. Ambika Ashish Tradelink LLP.

The assessee’s counsel argued that the hand-written Rozmels were not provided to him, and since he did not maintain books of accounts (as Section 44AA was not attracted due to low turnover), he was unaware of such documents. The counsel further contended that the computerized ledger account provided by the supplier showed discrepancies, questioning its authenticity. The AO, however, relied on the Rozmels and statements of third parties to conclude that the assessee made unaccounted cash purchases.

The Tribunal observed that the assessee was called upon to explain the source of the cash purchases but failed to do so. The assessee’s claim that he was not maintaining books of accounts was noted, but the Tribunal found that this very fact undermined his argument that the Rozmels could not be considered. Since the assessee was aware that he was not keeping books of accounts, he could not dispute the evidentiary value of the Rozmels, which were part of the seized material from the supplier’s premises.

However, the Tribunal acknowledged the practical difficulties faced by small traders in maintaining detailed books of accounts. It noted that the unaccounted purchases of Rs. 10,71,600/- represented undisclosed business turnover. Considering the trade practice in the cracker sales industry and the specific facts of the case—where the assessee had no books of accounts and relied on computerized ledgers—the Tribunal held that it would be unjust to tax the entire expenditure as unexplained. Instead, it directed that the assessee be taxed at 5% of the undisclosed turnover, representing the profit element. This approach aligns with the principle that in cases of unaccounted purchases, the addition should reflect the estimated profit rather than the full expenditure, especially when the assessee’s business is genuine but records are incomplete.

The Tribunal also addressed the ground of violation of natural justice (no cross-examination). While the assessee argued that statements of key persons were relied upon without providing cross-examination, the Tribunal did not explicitly rule on this ground. Instead, it focused on the substantive issue of the quantum of addition. The reopening under Section 147 was not invalidated, as the AO had sufficient material from the search to form a reasonable belief of income escaping assessment.

Conclusion

The ITAT partly allowed the appeal, sustaining the addition under Section 69C but reducing it to 5% of the undisclosed turnover of Rs. 10,71,600/-, i.e., Rs. 53,580/-. The balance of the addition was deleted. The Tribunal’s decision reflects a balanced approach, recognizing the evidentiary value of search material while mitigating the harshness of taxing the entire expenditure as unexplained. This ruling is significant for small traders who may not maintain formal books of accounts but are caught in search proceedings. It reinforces the principle that the tax authorities must consider trade practices and the assessee’s capacity to maintain records when applying Section 69C. The order also highlights the importance of providing seized documents to the assessee for a fair hearing, though the Tribunal did not find a violation in this case.

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